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Should an Online Retailer Penalize Its Independent Sellers for Stockout?

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  • Wenqiang Xiao
  • Yi Xu

Abstract

We consider an online retailer selling a seasonal product provided by an independent third†party seller who has superior information about the demand potential of the product. The online retailer receives customer orders and then sends the orders to the seller for fulfillment, using pre†installed capacity. The supplier privately installs capacity prior to the selling season. The online retailer faces the challenge to accomplish two goals: to incentivize the seller to install the right level of capacity and to extract full surplus from the seller. We show that the commonly used commission contracts in online retailing cannot effectively allow the online retailer to accomplish the two goals to achieve the first†best outcome. We then show that the retailer can effectively accomplish the two goals to achieve the first†best, using a lost†sale penalty contract which has three components: a fixed fee, a commission and a lost†sale penalty which will be charged to the seller if a lost sale occurs.

Suggested Citation

  • Wenqiang Xiao & Yi Xu, 2018. "Should an Online Retailer Penalize Its Independent Sellers for Stockout?," Production and Operations Management, Production and Operations Management Society, vol. 27(6), pages 1124-1132, June.
    • Handle: RePEc:bla:popmgt:v:27:y:2018:i:6:p:1124-1132
    DOI: 10.1111/poms.12859
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    Cited by:

    1. Chinonso E. Etumnu, 2022. "A competitive marketplace or an unfair competitor? An analysis of Amazon and its best sellers ranks," Journal of Agricultural Economics, Wiley Blackwell, vol. 73(3), pages 924-937, September.
    2. Suyuan Luo & Tsan‐Ming Choi, 2022. "E‐commerce supply chains with considerations of cyber‐security: Should governments play a role?," Production and Operations Management, Production and Operations Management Society, vol. 31(5), pages 2107-2126, May.
    3. Yugang Yu & Xue Li & Xiaoping Xu, 2022. "Reselling or marketplace mode for an online platform: the choice between cap-and-trade and carbon tax regulation," Annals of Operations Research, Springer, vol. 310(1), pages 293-329, March.
    4. Huang, Shupeng & Potter, Andrew & Eyers, Daniel & Li, Qinyun, 2021. "The influence of online review adoption on the profitability of capacitated supply chains," Omega, Elsevier, vol. 105(C).
    5. Guo Li & Hong Zheng & Mengqi Liu, 2020. "Reselling or drop shipping: Strategic analysis of E-commerce dual-channel structures," Electronic Commerce Research, Springer, vol. 20(3), pages 475-508, September.
    6. Shen, Bin & Xu, Xiaoyan & Yuan, Quan, 2020. "Selling secondhand products through an online platform with blockchain," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 142(C).
    7. Ren, Da & Guo, Rui & Lan, Yanfei & Shang, Changjing, 2021. "Shareholding strategies for selling green products on online platforms in a two-echelon supply chain," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 149(C).
    8. Avinadav, Tal & Chernonog, Tatyana & Khmelnitsky, Eugene, 2021. "Revenue-sharing between developers of virtual products and platform distributors," European Journal of Operational Research, Elsevier, vol. 290(3), pages 927-945.
    9. Koussis, Nicos & Silaghi, Florina, 2023. "Revenue-sharing and volume flexibility in the supply chain," International Journal of Production Economics, Elsevier, vol. 261(C).

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