O nline marketplaces, such as those operated by Amazon, have seen rapid growth in recent years. These marketplaces serve as an intermediary, matching buyers with sellers, whereas control of the good is left to the seller. In some cases, e.g., the Amazon marketplace system, the firm that owns and manages the marketplace system will also sell competing products through the marketplace system. This creates a new form of channel conflict, which is a focus of this article. We consider a setting in which a marketplace firm operates an online marketplace through which retailers can sell their products directly to consumers. We consider a single retailer, who currently sells its product only through its own website, but who may choose to contract with Amazon to sell its product through the marketplace system. Selling the product through the marketplace expands the available market for the retailer, but comes at some expense, e.g., a fixed participation fee or a revenue sharing requirement. Thus, a key question for the retailer is whether she should choose to sell through the marketplace system, and if so, at what price. We analyze the optimal decisions for both the retailer and the marketplace firm and characterize the system equilibrium.

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Delays in product availability are common in e-commerce where electronic retailers try to manage with very low inventories. While this lowers inventory costs, the negative effect of increased stockouts is to reduce net demand for the product. We analyze the effect of offering a lower price during stockout to compensate for a customer’s waiting time, using an EOQ-type inventory-modeling framework but solving simultaneously for both the optimal prices and the lengths of the in-stock and stockout periods. The lower price recaptures some lost demand and has an important synergistic effect: the increased sales rate leads to lower unit costs for inventory holding and product ordering. Stockout compensation improves market efficiency and increases the retailer’s sales and profit. The optimal stockout-compensation policy is to choose period lengths and prices such that the two periods have equal effective prices (i.e., the optimal stockout compensation equals the average waiting cost for a customer). Compared with the pure wait-free and stockless-operation policies, stockout compensation not only yields greater profits, but also greater revenues, lower unit costs, and increased consumer surplus and market coverage. Compared with a backorder policy without compensation, the stockout compensation policy improves profits and social welfare but at the expense of consumer surplus. Allowing for strategic consumer behavior under knowledge of future prices, the equal-effective-prices solution defines a rational-expectations equilibrium.

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