Coopetition in Platform-Based Retailing: On the Platform’s Entry

We study the dynamic incentive interactions between a platform and a third-party seller over two stages, where the seller exerts product-value-enhancement effort in the first stage in anticipation of the platform’s potential entry in the second stage. Upon entry, the platform can exert effort to boost the value of the product sold by the platform, with positive spillovers to the value of the product sold by the platform. We show the existence of both the protective and the receptive regimes, characterizing the necessary and sufficient conditions for each regime. These conditions are of thresholds type with respect to the parameters including the degree of spillover, the referral rate, and the competition intensity. In the protective (receptive) regime, the seller is worse (better) off with the platform’s entry than without, thereby distorting effort downward (upward) from the first best to deter (induce) the platform’s entry to the products of intermediate value. Notably, if the spillover effect is negative, only the protective regime will arise. We also provide the necessary and sufficient conditions under which the platform’s nonentry commitment strictly improves the platform’s profits by restoring the seller’s effort to the first best, achieving the win-win outcome for both the platform and the seller.