Title：Impact of Platform Owner’s Entry on Third-Party Stores

Abstract：Online marketplaces thrive by offering products from a wide array of third-party stores. One major decision faced by the owners of online marketplaces is whether they should enter into the market and sell products directly to customers. Although a few game-theoretical models have addressed this issue, there is still no empirical research to guide the decisions of managers. To fill this gap, this paper empirically investigates the impact of a platform owner’s entry on the demand of third-party stores, as well as their potential reactions, using data from a Chinese e-commerce platform which supports both online and offline transactions. We establish several important findings. First, we find that the offline demand of competing third-party stores decreases with the entry of the platform, whereas their online demand does not change significantly. Second, we systematically investigate three potential mechanisms underlying the effects of platform entry in the online and offline channels: the competition effect, the spillover effect, and the disintermediation effect. We show that the decreased offline demand results from third-party stores’ defensive strategy to divert their offline customers away from the platform (i.e., disintermediation), rather than from the defection of customers under competition. Third, in contrast to the prior finding from mobile app platforms, we find that the demand of larger third-party stores decreases more with the entry of the platform, suggesting that the effect of platform entry is context dependent. Our study suggests that, while making entry decisions, platform owners should consider the nature of their marketplaces (i.e., whether the competition among sellers is exclusive), as well as the potential reactions from third-party sellers.