Platform–merchant competition for sales services

• Author: Carlotta Mariotto,Marianne Verdier
• Published date: 01 October 2020
• DOI: http://doi.org/10.1111/jems.12391
• Date: 01 October 2020

J Econ Manage Strat. 2020;29:834–853.wileyonlinelibrary.com/journal/jems834

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© 2020 Wiley Periodicals LLC

Received: 10 December 2018

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Revised: 20 May 2020

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Accepted: 11 June 2020

DOI: 10.1111/jems.12391

ORIGINAL ARTICLE

Platform–merchant competition for sales services

Carlotta Mariotto

1

|Marianne Verdier

2,3

1

European Commission DG

COMP—Chief Economist Team,

Sint‐Joost‐ten‐Noode, Belgium

2

CRED (TEPP), Université Paris II

Panthéon‐Assas, Paris, France

3

Centre d'Economie Industrielle

(CERNA), Ecole Nationale Supérieure des

Mines de Paris, Paris, France

Correspondence

Marianne Verdier, CRED (TEPP),

Université Paris II Panthéon‐Assas, Paris,

France.

Email: marianne.verdier@u-paris2.fr

Abstract

In this paper, we study whether a monopolistic platform prefers to impose

price parity on sellers when the latter may sell directly to consumers. The

platform delivers a higher quality to consumers than the direct sales channel

and may generate efficiency gains for sellers. We show that the platform im-

poses price parity if the degree of heterogeneity between consumers is high

with respect to the quality of service on the seller side. This restriction lowers

the total transaction fee paid by consumers and sellers. Consumers who buy

from sellers with low transaction benefits pay a lower purchase price. The

average consumer and seller surplus may either increase or decrease.

1|INTRODUCTION

In several markets, sales services impact retailers' transaction costs and consumers' perception of product quality.

Retailers may strategically decide to sell directly to consumers or to outsource their sales services to a platform. For

example, a florist may sell flowers directly at a physical shop or via an online marketplace, such as Interflora. However,

platforms may have enough market power to impose restrictions on retailers, such as price parity clauses (PPCs). PPCs

are agreements whereby the price of the product sold on the platform cannot be higher than the price available on the

seller's website. A key policy question is whether this restriction increases retail prices and reduces consumer surplus.

In this paper, we analyze a platform's incentives to impose PPCs when sellers trade off between direct sales and

platform sales.

1

The two sales channels are differentiated in quality on the consumer side and in terms of efficiency on

the seller side. We show that the platform prefers to impose price parity if the degree of heterogeneity between

consumers is high with respect to the quality of service on the seller side. PPCs may reduce seller participation on the

platform and lower the platform's total transaction fee. They reduce the total purchase price of consumers who buy

from sellers with low transaction benefits and may sometimes increase consumer surplus.

Recently, in various industries (i.e., hotel booking, e‐book, and payments) and several countries, competition

authorities have examined platforms' PPCs.

2

According to the main theory of harm, PPCs reduce consumer and

merchant surplus through different mechanisms: inflation of platform fees and retail prices, constraints on consumer

choices, and restrictions of merchants' strategic options. On the one hand, platforms argue that PPCs prevent the free‐

riding of consumers, which would occur when consumers search on the platform and then buy on the direct sales

channel with a lower price. On the other hand, sellers sometimes fail to sell online through platforms given the amount

of fees paid to intermediaries.

3

The theoretical research has found support for the anticompetitive effects of PPCs (see

Boik & Corts, 2016; Edelman & Wright, 2015; Johnson, 2017). Like Johansen and Verge (2017), our paper offers a

divergent view by showing that PPCs do not necessarily lead to higher fees and higher retail prices. In the presence of

quality differentiation between sales channels and potential efficiency gains for sellers, PPCs may sometimes increase

consumer and seller surplus.

We build a model to study competition between a platform and a continuum of monopolistic sellers to offer sales

services. The platform and sellers do not compete in the (main) retail market.

4

We analyze how vertical differentiation

between sales channels impacts the platform's incentives to impose PPCs and the total surplus of users. On the

consumer side, we assume that the platform adds value to a consumer's purchase by offering a selling service of higher

quality than the direct sales channel. On the seller side, the platform brings heterogeneous benefits to sellers that

reduce their marginal costs.

At the first stage of the game, the platform decides whether or not to impose price parity on sellers. The platform

also chooses the transaction fees charged to consumers and sellers. At the second stage of the game, sellers have to

decide whether to offer their product through the platform sales channel, the direct sales channel, or both. At the last

stage of the game, consumers decide whether or not to buy the product and choose their preferred sales channel. If two

sales channels are available, consumers trade off between two versions of the same product that they perceive as

differentiated in quality.

We start by analyzing the case in which the platform does not impose any restrictions on sellers. If sellers are

allowed to price discriminate across sales channels, they obtain higher profits by doing so (Anderson & Dana, 2009).

Price discrimination enables sellers to internalize the consumer benefits of buying a high‐quality service and to pass

through to consumers the opportunity cost of selling via the platform. Therefore, the retail price on the platform

depends on the total fee charged by the platform net of the transaction benefit. However, both sales channels are used

by consumers only if the joint opportunity cost of buying through the platform is positive. Otherwise, consumers only

buy through the platform. We show that all sellers prefer to join the platform if there are no PPCs, because they are

always able to pass through their participation costs to consumers. The platform's profit depends on the total fee paid by

consumers and sellers. The monopolistic platform chooses the total fee such that its mark‐up is invertly proportional to

the elasticity of the transaction volume with respect to the total fee. If the elasticity of the transaction volume is low, the

platform sets a high total fee such that all sellers sell through both sales channels. If the elasticity of the transaction

volume is higher, the platform reduces the total fee, such that some sellers only sell through the platform because the

direct sales channel is never used by their consumers.

Then,westudythecaseinwhichtheplatformimposesPPCs.Under price parity, sellers must choose the same retail

priceforthehigh‐and low‐quality services. They trade off between setting a high price such that consumers never buy on

the direct sales channel or a low price, such that consumers buy from both sales channels. The result of this trade‐off

depends on the seller's net benefit of selling through the platform. If the seller decides to set a low price, he neither extracts

the consumer's surplus of buying the high quality nor does he pass through his net benefit of selling via the platform. The

first effect reduces the seller's profit, whereas the second increases it. For high values of the transaction benefit, the second

effect dominates the first. Therefore, the seller prefers to set the monopolistic price for the low quality, which implies that

both sales channels are used by consumers. For given platform fees, price parity has no impact on the price of the direct

sales channel and reduces the price on the platform sales channel. For low values of the transaction benefit, the seller sets

the monopolistic price for the high quality and all consumers buy through the platform. For given platform fees, price parity

has no impact on the price of the platform sales channel and increases the price on the direct sales channel.

We show that PPCs may reduce seller participation for given platform fees. If the platform chooses a low consumer

fee, all consumers prefer to buy through the platform when possible. In that case, a seller joins the platform only if his

transaction benefit is sufficiently high. Otherwise, he prefers not to join the platform. If the platform chooses a high

consumer fee, some consumers prefer to buy through the platform and others directly. A seller joins the platform if and

only if it reduces its net selling cost.

Under price parity, and unlike in the no‐restrictions case, the platform's profit depends on the price structure. The

price structure impacts: (a) the sellers' incentives to sell either at the monopolistic price for the high quality or the

monopolistic price for the low quality; (b) seller participation; and (c) consumer demand for the platform if sellers sell

through both sales channels. The platform obtains a higher profit by choosing to charge a zero fee on the seller side and

a positive fee on the consumer side, such that all sellers participate on the platform. In some cases, the platform obtains

the same profit with a positive consumer fee and a positive merchant fee. In the latter situation, PPCs reduce seller

participation at the equilibrium of the game.

We analyze the impact of price parity on the transaction fees and retail prices. PPCs decrease the total transaction

fee paid by a consumer and a seller. This result is caused by our assumption that sellers may refuse to join the platform

under price parity. Under price parity, the platform is forced to drop the seller fee to attract sellers and cannot recoup

this loss by increasing the consumer fee, otherwise consumer demand would decrease because of competition between

the sales channels. As a result, the total transaction fee falls and the total purchase price (retail price + consumer fee) is

reduced for sellers who enjoy low benefits of selling through the platform.

Subsequently, we determine whether the platform prefers to impose price parity. We show that a platform prefers to

impose price parity if the degree of heterogeneity on the consumer side is sufficiently high with respect to the quality of

MARIOTTO AND VERDIER

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