In the early days of online retailing, many online retail platforms operated as “reselling channels”—purchasing goods from manufacturers and reselling them to consumers. Over time, some platforms (notably Amazon and JD) established “agency channels” (also known as “marketplace channels”) that allowed manufacturers to sell directly to consumers. Through their online retail channels, giant platforms can collect rich sales and consumer data. However, only some platforms share that information with manufacturers. This creates a dilemma for manufacturers, who need to decide whether to encroach on the sales of their products through the reselling channel by also selling through the agency channel.

HKUST’s Albert Y. Ha and colleagues shed new light on this dilemma, showing that when platforms share information, manufacturers benefit from the encroachment represented by the manufacturers’ use of both channels, but if the information is too accurate, sharing information can hurt the platforms.

According to the authors, “[information] sharing decisions are commonly faced by firms in online retailing.” In their study, they ask three important questions. First, what is the incentive for a platform to share its demand information with the manufacturer? Second, how does information sharing affect the manufacturer’s decision about whether to encroach by adding an agency channel to an existing reselling channel on the platform? Third, what factors go into the encroachment decision?

To address these questions, the authors develop an innovative, multi-stage game that unfolds in several steps. First, the manufacturer decides whether to encroach. Second, the platform decides whether to share demand information with the manufacturer; if they have a prior agreement on information-sharing, then the information is shared. Third, the manufacturer sets a wholesale price for use in the reselling channel. Fourth, the platform sets the retail price for the reselling channel at the same time that the manufacturer sets the retail price for the agency channel. These steps form the basis of the authors’ analytical model, which they use to evaluate the benefits and drawbacks of encroachment.

Overall, the results show that “encroachment and information sharing are complementary.” Information sharing benefits “when the business conditions are such that the manufacturer encroaches and encroachment benefits the platform,” say the authors. “More specifically, [information sharing] expands the business conditions under which encroachment leads to a win-win outcome” for both firms. The platform often has an incentive to share information when the manufacturer encroaches, because encroachment mitigates the double marginalization effect of wholesale price under information sharing and increases the benefit of information sharing to the platform due to the responsive pricing effect in the agency channel (i.e., the manufacturer can adjust the retail price of the agency channel in response to the updated information information). However, encroachment does not always benefit the platform: it can benefit the manufacturer at the platform’s expense when more accurate consumer and demand information is provided by the platform to the manufacturer.

These results indicate that “encroachment and information sharing decisions are complementary in the sense that one decision enhances the value of the other decision to the decision-maker,” say the researchers. Furthermore, on a practical level, when platforms make information sharing decisions, “they have to account for their impact on the manufacturers’ channel decisions.” These novel findings have critical implications for manufacturers, online retailing platforms, and ultimately consumers.