The effect of P2P marketplaces on retailing in the presence of mismatch risk
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Date
2014-04-10
Authors
Jiang, Lifei
Journal Title
Journal ISSN
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Publisher
University of Waterloo
Abstract
Consumers frequently face mismatch risk as goods they purchase may be deemed inappropriate or below expectations. Due to this risk, consumers may avoid purchasing such goods and consequently hurt retailers. Can the emergence of peer-to-peer (P2P) marketplaces benefit retailers? On the one hand, P2P marketplaces can mitigate some of this risk by allowing consumers to trade mismatched goods. On the other hand, P2P marketplaces impose a threat on retailers as they compete with them over consumers. We develop a two-period model that highlights the effects introduced by P2P marketplaces.
We show that a P2P marketplace benefits both the retailer and consumers when the
wholesale price is sufficiently high and hurts them both when the wholesale price is low. The introduction of a P2P marketplace can relieve consumers from the mismatch risk and induces the retailer to post a higher price. However, when the wholesale price is low, the platform manages to extract most, or all, of the consumers surplus and directly hurts consumers, and eventually the retailer who experiences lower sales in both periods. With a high wholesale price the P2P marketplace is limited in its ability of extracting consumer surplus, which increases the retailer sales and benefits both the retailer and consumers. We further observe that social welfare is generally higher unless the wholesale price is relatively low.
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Keywords
mismatch risk, P2P marketplace, retailing strategy, backward induction