Can Merchants Benefit from Entry by (Amazon-Like) Platform if Multiagent Prices Signal Quality?

Merchants are wary of a platform’s competitive entry reducing sales and margins. Profit-maximizing platforms seek to provide credible quality information to gain consumer trust and confidence. Can a platform enter so that resulting multisender prices alleviate consumers’ uncertainty by signaling quality? Can merchants also benefit from platform entry? We provide answers by analyzing strategic platform and merchant pricing under quality uncertainty. A modeling innovation is a leader-follower framework for platform-merchant competition. Consumers resolve uncertainty using both platform and merchant prices. Using what we label perfect Bayes-consistent beliefs, we identify perfect Bayesian equilibrium that satisfies the intuitive criterion, and also out-of-equilibrium beliefs that are unprejudiced. A substantive finding is that platform entry can raise merchant profits when the quality is high by moving the equilibrium from pooling to separating, and supporting higher prices. Another strategic consequence of platform entry could be a separating equilibrium with incomplete market coverage due to price distortion moving to one of complete market coverage due to seller competition. Indeed, conditions exist in our model for an equilibrium outcome identical to complete information. Finally, facing entry cost, a platform may choose to enter only with high quality but quality revelation remains price dependent and not based on mere entry.