The bright side of third‐party marketplaces in retailing

Abstract A prevalent practice for retailers is to provide a marketplace for third‐party sellers (3P sellers) to sell products directly to consumers, charging the sellers a commission fee. This study investigates the downstream retailer's optimal strategy to introduce a 3P seller who sells a substitutable product. We develop a game‐theoretic model, through which our first result shows that the retailer introduces a 3P seller only when the marginal costs of the products are in a medium range. Second, the retailer's strategy of introducing a 3P seller may benefit the manufacturer, even though the introduction creates downstream competition that may reduce the sales of the manufacturer's product. This happens because the strategy of introducing a 3P seller can mitigate the double marginalization between the manufacturer and retailer. In contrast to the conventional wisdom that introducing a 3P seller always results in a “win–lose” outcome for the retailer and manufacturer, we derive evidence that introducing a 3P seller can lead to a “win‐win” outcome for the retailer and manufacturer and thus improve the channel performance. Lastly, we find that the retailer's 3P seller introduction strategy can also improve the consumer surplus because this strategy increases competition.