Sourcing strategies of e-commerce platforms for private-label products: Roles of manufacturers’ production cost reduction incentives and selling format choice

Private-label (PL) products have expanded rapidly on e-commerce platforms, which has raised a fundamental question regarding whether platforms should source PL products from incumbent national brand manufacturers (NBM sourcing) or third-party manufacturers (outsourcing). Although outsourcing mitigates double marginalization, many platforms frequently rely on NBM sourcing—a pattern that has not been clearly explained. To address this gap, we develop a unified game-theoretic model that endogenizes a national brand manufacturer’s selling format choice between reselling and agency selling, a platform’s PL sourcing decision, and manufacturers’ cost reduction efforts. In contrast to the intuitive belief that access to an additional revenue stream uniformly increases investment incentives, our analysis indicates that NBM sourcing can reduce cost reduction incentives relative to outsourcing under agency selling, particularly when products are highly substitutable. Moreover, the selling format moderates how cost reduction rationalizes NBM sourcing. Under reselling, cost reduction facilitates NBM sourcing by reducing wholesale prices at low substitutability and by preserving the viability of PL production at high substitutability. Under agency selling, in addition to these effects, cost reduction gains are transmitted to the platform through commissions, rationalizing NBM sourcing even when it entails a higher PL wholesale price at moderate-to-high substitutability and intermediate commission rates. Furthermore, introducing endogenous cost reduction enables all four combinations of selling format and PL sourcing strategy to arise in equilibrium, facilitating strategic interaction between these two decisions. Finally, our results are robust and yield additional insights under asymmetry in market sizes, asymmetry in cost reduction efficiency, and brand spillover effects.