Too Big to Cooperate with a Platform? Effects of Loyal Customer Base and Commission Rate on Seller’s Channel Choices

Online platforms have become an important channel for sellers to reach potential customers. Although small sellers rely on platforms as their main market channel, large sellers who have direct channels and have loyal customer bases, may not have an incentive to sell on online platforms. We develop a game-theoretic model with an online platform and two sellers that differ in size and sell substitutable products. Comparing equilibria under cooperation and non-cooperation cases, we found that high-value products might be sold at a lower price under non-cooperation, but cooperation between the large seller and the platform can correct this product value-price mismatch. More importantly, the platform’s and large seller’s loyal customer bases and the platform’s commission rate influence the unilateral or joint (with transfer payment) incentive to cooperate. The large seller’s incentive to cooperate can be explained by expanded market coverage or reduced price competition. As its direct channel advantage increases, the large seller’s incentive to cooperate first diminishes, driven by the cannibalization effect resulting from price consistency, but is then enhanced due to the market expansion effect. However, if the smaller seller responds aggressively, both the platform and the large seller may lose their incentives to cooperate as the platform’s loyal customer segment expands. Cooperation, however, can reduce price competition when the commission rate is moderate and the platform’s loyal customer segment is small, thus leading to a win-win-win outcome, benefiting the platform as well as the two sellers.