When Should Firms Delist from a Dominant Gatekeeper Platform?

We study the circumstances under which a dissatisfied third-party seller (firms) on a dominant retail platform, such as Amazon or WeChat will team up with other competing firms on the platform to establish an independent niche retail platform. The dissatisfaction of firms stems from governance rules on the dominant retail platform that restricts the sellers’ decision rights with respect to pricing. A dominant platform that charges a percentage fee of the value of goods of each transaction – the de-facto industry standard – has the incentive to maximize firms’ revenues by micro-managing the pricing-setting behavior of these sellers. On the other hand, firms prefer profit maximization rather than revenue maximization. Leaving the dominant platform for a niche retail platform in response to these restrictions may be a viable option, but this option also comes at the cost of potentially lower demand. Using a general model, we analytically identify the conditions under which firms from a particular industry are better off by delisting from a dominant platform, and instead listing under a niche platform on which they can sell their products. For firms listing on the dominant platform, the incentive incompatibility between the dominant platform (which prefers that firms revenue maximize) and the firms (which prefer profit maximization) leads to suboptimal choices of quantity. We find that the extent to which this choice is sub-optimal depends on an industry characteristic - the marginal cost of production, so that the number of firms leaving the dominant platform increases in the marginal cost. Because firms with high customer loyalty retain more of their customers when they delist from the dominant platform and list at the niche platform, it is reasonable to expect that firms with high customer loyalty choose to delist. However, surprisingly, this is not always the case. Whether firms with high customer loyalty or low customer loyalty move to the niche platform depends on the marginal costs (and consequently the quantity distortion described above) and on the differential effect of loyalty on dominant platform and niche demand