In the world of omnichannel retail, some branded manufacturers open a flagship store at online marketplaces, while others avert it. How does flagship entry affect consumers, online platform, and various sellers on the platform? We answer these questions using proprietary data of Alibaba.
Focusing on a leading product category within cosmetics, we find flagship entry benefits consumers in three ways: first, the new flagship store expands product variety; second, it intensifies price competition, especially within-brand competition, leading to lower price of non-flagship sellers of the same brand; third, it may improve consumer perception of the platform, thus attracting more buyers to buy in the study category on the platform. In the meantime, flagship entry affects different sellers differently: on one hand, same-brand resellers sell fewer items despite lower price, because the new flagship store tends to cannibalize their business; on the other hand, sellers of other brands may benefit as the buyer base expands, and such benefit is most conspicuous for the flagship store of other brands that is already operating on the platform.
In total, flagship entry improves the gross merchandise value and consumer welfare of the platform, while hurting existing sellers of the entry brand. Counterfactual simulations suggest that the improvement on consumer welfare would have been lower if flagship entry were accompanied by constraints on other third-party sellers. This is because constraints such as limiting unauthorized sellers, limiting authorized sellers, or only keeping top sellers on the platform would reduce product variety and soften price competition.
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This is a joint seminar with the technology and operations management unit seminar.