Abstract: Online retailers who operated as traditional resellers have also started to adopt the marketplace approach, wherein the retailer charges a commission, and the suppliers determine the retail price. We model the interactions between a retailer and two suppliers, who offer products of differing qualities, face loyal consumers, and enjoy quality-and price-dependent demand functions. We identify what contract type – only marketplace, only wholesale, or a combination of marketplace and wholesale (i.e., hybrid) – will prevail. We also endogenize the suppliers' product quality level decisions. In contrast to marketplace's dominance when there is a single supplier, depending on the heterogeneity in the suppliers' product quality, operating only a marketplace may result in either a suboptimal commission rate or the exclusion of the supplier offering the high-quality product from the contract. We find that the retailer may then choose a hybrid contract to better tailor the contract to each supplier type. In this case, the supplier who is assigned the wholesale mode is better off and charges higher prices, than if they were the sole supplier. When suppliers' endogenous quality decisions are taken into account, the hybrid contract induces a unique equilibrium where the low quality product is sold via marketplace while the other is sold via wholesale. We provide empirical support for this result using data from a leading US-based retailer. Our results are robust to allowing the suppliers to choose the contract and considering a continuum of supplier types. Our findings provide guidance to retail managers who are transitioning into marketplaces on when and what type of hybrid contract would be advisable to offer. By introducing heterogeneity in the suppliers' product quality, our work also contributes to the literature by uncovering a new driving force for why the hybrid contract emerges as the retailer's preferred choice.
About the Speaker: Prof. Aditya Jain is professor of Operations and Decision Analytics at the Zicklin School in Baruch College CUNY. His research areas are supply chain management, retail operations, and healthcare operations, with a focus on leveraging analytics to address complex operational challenges. Prior to his current role, he served as a faculty at Indian School of Business and Kellogg School of Management. Prof. Jain has been actively involved in start-ups in the space of supply chain analytics and is currently focused on the digital transformation of supply chains, exploring how emerging technologies like Generative AI can optimize supply chains.
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