Some data shows competing against the platform can help sellers, if not consumers
Running a platform for other merchants while also selling goods that compete with those merchants turns out to be a fabulous business model, an apparent conflict of interest and a long-running and unresolved issue for antitrust regulators.
The current Federal Trade Commission chair, Lina Khan, zeroed in on Amazon’s dual roles in a now famous 2017 Yale Law Review article, long before her Biden administration appointment. Countless other elected officials and competition experts have also called out the conflict.
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And yet, Amazon’s business — both the one selling its own goods and the platform for third-party sellers — has only grown.
AMZN Revenue (Quarterly) data by YCharts
There’s no denying platforms such as Amazon hold sway over third-party sellers, but the complaints don’t fit historic antitrust patterns. Consumers, the typical victims in antitrust cases, are pretty much delighted with Amazon and other mega-platforms that make shopping convenient and cheap. And mounting a case against a platform — even making an informed economic argument — is tough because the platforms control so much of the relevant data and to outsiders they’re highly opaque.
And most third-party sellers are reluctant to complain, given the platforms are where they do business.
Researchers, meanwhile, are left to scrape data off a platform’s website or work with the limited data they can access.
Enter UCLA Anderson’s Christopher Tang, who, serving as co-chair of a research challenge overseen by Manufacturing and Service Operations Management, saw opportunity.
The challenge offered a single month of data from JD.com, an online e-commerce platform operating in Asia, South America and elsewhere. The company had helpfully suggested topics to researchers — “Which product attributes and/or features have predictive power about customer’s product choice? Does a customer’s product choice differ by channel (e.g., purchasing via mobile phones versus personal computers), by region and by brand loyalty?” — though no restrictions.
Tang chose the issue of third-party sellers competing with JD.com on its platform.
The resulting paper — from University College London’s Yiting Deng, UCLA Anderson’s Tang, University of International Business and Economics’ Wei Wang and University College London’s Onesun Steve Yoo — suggests that third-party sellers actually performed better than expected when competing with the platform, charging higher prices and increasing their revenues.
The Benefits of Competition from the Platform
Examining sales data from JD.com, the authors found that, on average, third-party sellers were able to raise prices by 1.2% after JD.com introduced competing products. Sales volumes increased by 4.8%.
The authors also found evidence that JD.com chose to introduce competing products for the cheapest and most popular items. This, the authors suggest, indicates a platform will introduce competing products only when there’s enough demand for the platform and its third-party sellers to coexist.
“The platform can be a ‘friend’ instead of a ‘foe’ when it enters the market to compete with third-party sellers,” the authors write.
Certainly, the relationship between platforms such as Amazon and JD.com and third-party sellers is a complicated one. It’s valuable for the platforms — Amazon’s nearly 2 million Marketplace merchants account for 60% of its sales of physical products, founder Jeff Bezos told Congress in 2020. Sellers at least have the possibility of tapping into Amazon’s 300 million customers. Consumers get greater choice.
Amazon, for its part, has been accused of using sales data from independent merchants to develop competing private-label products. Sellers, fearing reprisal, are reluctant to complain.
What is less clear is how sellers fare when competing with the platform. Some researchers have found that even successful third-party sellers get pushed out when Amazon introduces a competing product. Others have found the opposite result.
For their study, published online by Service Science, Tang and his co-authors examined one month of customer data provided by JD.com for a single, anonymous product category. Information about individual products is limited to a brand ID and two numerical ratings representing different product attributes, which the authors use to identify similar items sold by the platform and by third-party sellers.
Competition from Platform Raises Product Visibility, Prices
Of the nearly 2,300 “product spaces” — items and similar alternatives — analyzed, 18 were previously sold by its third-party merchants and were introduced by JD.com in the month. In addition, the data indicates that JD.com was already competing in 61 product spaces at the start of the month.
The small sample size and other limitations in the data make it impossible to conclude that the platform’s entry caused sellers to raise prices or accounted for the increase in revenues. So the authors devised a theoretical model to help explain the counterintuitive findings.
At the heart of the model is the assumption that the platform won’t enter a market if doing so will drive out third-party sellers. This makes sense as without the independent sellers, the platform loses valuable revenues from commissions and fees. Indeed, Morgan Stanley has estimated that Amazon earns a 20% margin on third-party seller fees, compared with less than 5% for its retail sales.
In the model, the platform’s entry raises consumer awareness of the product and serves as an implicit endorsement. This expands the size of the potential market, with the increased demand spilling over to the benefit of third-party sellers.
“Both the platform (which earns more sales commissions in addition to its profit generated from direct sales) and the sellers (who benefit from the positive spillover) benefit from the market entry,” the authors conclude.
Complaints about the inherent conflict of interest are unlikely to go away. Last year, Amazon settled a European Union antitrust suit by agreeing to make changes to the presentation of goods in ways that might level the playing field between its own products and the same items sold by Marketplace merchants.
UCLA Distinguished Professor; Edward W. Carter Chair in Business Administration; Senior Associate Dean, Global Initiatives; Faculty Director, Center for Global Management
About the Research
Deng, Y., Tang, C.S., Wang, W., and Yoo, O. S., (2023). Can Third-Party Sellers Benefit from a Platform’s Entry to the Market? Service Science.