Swimming With the Shark: The Effects of Platform Price Promotion and In-Platform Advertising on Third-Party Retailer Performance in Hybrid Online Retailing

Abstract

Hybrid retailing is an emerging business model that melds traditional reselling with the newer platform approach. A platform owner resells directly to consumers (the reselling model) and also allows third-party retailers (TPRs) to sell on the platform for a commission (the platform model). Given the integral role of TPRs in the hybrid retailing ecosystem, research is imperative to understand how the strategic actions of the platform owner could affect the performance and activities of TPRs. Using a longitudinal dataset of an online platform that adopts a hybrid-retailing structure, the research proposes that the platform owner's strategies, specifically price promotion and in-platform advertising, can affect TPR sales performance directly (through positive spillover effects and negative crowding-out effects) and indirectly (by prompting TPRs to respond with their price promotion and in-platform advertising). Further, such direct and indirect effects depend on TPR size. The findings indicate significant direct effects: the platform owner's price promotion has a positive spillover effect on TPR sales, and more so for larger TPRs; the platform owner's in-platform advertising has a negative crowding-out effect on TPR sales and more so for smaller TPRs. The paper also reports indirect effects: TPRs tend to use price promotion to respond to both strategies of the platform owner, and TPR's price promotion also has positive consequences for TPR sales, and the effects are stronger for larger TPRs. Given the unique coopetition relationship between the platform owner and TPRs in the hybrid retailing context, this research provides firsthand empirical evidence that the platform owner's strategies can significantly affect TPR performance through direct and indirect effects, shows larger TPRs benefit the most from the platform owner's price promotion, while smaller TPRs suffer the most from the platform owner's in-platform advertising, and TPRs favor price promotion regardless what strategies the platform owner uses. These results indicate that both platform owners and policymakers should consider the differential implications for TPRs of different sizes in terms of the social welfare of the platform ecosystem.