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What type of contract should e-tailers offer sellers when facing internal competition

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  • Yael Perlman

    (Bar-Ilan University)

Abstract

This paper investigates whether an e-tailer should act as a platform and offer customers the product of a seller who can reach customers only through the e-tailer, and if so, what type of contract to offer the seller: a proportional commission based on revenue or a fixed fee per unit sold. The e-tailer also chooses the product line design: offer only her own product, offer only the outside seller’s product, or offer both her own product and the seller’s product. Intuitively, when the e-tailer’s product outperforms the seller’s product in terms of value-to-cost ratio, the e-tailer should not offer the seller’s product. However, non-intuitively, we also identify conditions in which the e-tailer remains better off not opening her platform to the seller even though the seller’s value-to-cost ratio is higher than the e-tailer’s and show how these conditions depends also on the consumers valuations. Regarding the type of contract to offer the seller, we find that most of the time, a proportional commission based on revenue is the best contract, guaranteeing the highest e-tailer profit. However, this is not always the case since there are situations when a fixed fee contract reduces the potential of internal competition.

Suggested Citation

  • Yael Perlman, 2023. "What type of contract should e-tailers offer sellers when facing internal competition," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 31(4), pages 1009-1027, December.
    • Handle: RePEc:spr:cejnor:v:31:y:2023:i:4:d:10.1007_s10100-022-00818-0
    DOI: 10.1007/s10100-022-00818-0
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    References listed on IDEAS

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