New-Media Advertising and Retail Platform Openness

forthcoming, MIS Quarterly

52 Pages Posted: 21 Nov 2015 Last revised: 7 Feb 2021

See all articles by Jianqing Chen

Jianqing Chen

The University of Texas at Dallas, Jindal School of Management

Zhiling Guo

Singapore Management University, School of Computing and Information Systems

Date Written: August 1, 2014

Abstract

We recently have witnessed two important trends in online retailing: The advent of new media (e.g., social media and search engines) makes advertising affordable for small sellers, and large online retailers (e.g., Amazon and JD.com) open their platforms to allow even direct competitors to sell on their platforms. We examine how new-media advertising affects retail platform openness. We develop a game-theoretic model in which a leading retailer, who has both valuation and awareness advantages, and a third-party seller, who sells an identical product, engage in price competition. We find that the availability of relatively low-cost advertising through new media plays a critical role in influencing the leading retailer to open its platform and to form a partnership with the third-party seller, which would be impossible when the cost of advertising is relatively high. Low-cost advertising can increase consumer surplus either directly via the third-party seller's advertising or indirectly via the partnership on the leading retailer's platform. We also find that the leading retailer has a greater incentive to open its platform and that the partnership is more likely to be formed when there are network effects, when the leading retailer can control the third-party seller's exposure on its platform, or when the leading retailer can offer a direct advertising service to the third-party seller. Meanwhile, the constraints on the third-party seller's advertising budget can reduce the leading retailer's incentive to open its platform, making the partnership less likely. Our analysis offers important insights into the underlying economic incentives that help explain the emerging open retail platform trend in the era of new-media advertising.

Keywords: Online Platform, Platform Openness, Online Advertising, Long Tail

JEL Classification: D37, M2

Suggested Citation

Chen, Jianqing and Guo, Zhiling, New-Media Advertising and Retail Platform Openness (August 1, 2014). forthcoming, MIS Quarterly, Available at SSRN: https://ssrn.com/abstract=2694073 or http://dx.doi.org/10.2139/ssrn.2694073

Jianqing Chen (Contact Author)

The University of Texas at Dallas, Jindal School of Management ( email )

800 West Campbell Road
Richardson, TX 75080
United States

Zhiling Guo

Singapore Management University, School of Computing and Information Systems ( email )

80 Stamford Road
Singapore, 178902
Singapore

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