Contracting and advertising for e-commerce platforms with private-effectiveness information

Abstract

In online sales, e-commerce platforms commonly employ marketplace and reselling modes. Motivated by this industry practice, this study investigates which sales mode a platform should choose and how the platform should contract with a manufacturer in each mode. We consider that advertising effectiveness is the platform’s private information. A game-theoretic model is developed to explore the advertising and pricing decisions of three contracts within these modes. We also explore whether and how a platform can signal its private information to the manufacturer. Our analysis reveals significant differences in the informational role of advertising among the three contracts. In marketplace mode, the platform can signal its effectiveness through the advertising level. A proportional-fee contract is more efficient in signaling than a fixed-fee contract. Specifically, when the fixed-fee contract is employed, the platform with low effectiveness must distort its advertising level downward and thus incur signaling costs if the effectiveness uncertainty is low. In contrast, when the proportional-fee contract is employed, signaling is always costless. In reselling mode (wholesale-price contract), although the platform is unable to signal its effectiveness, the information asymmetry does not affect the manufacturer’s wholesale price decision. Moreover, we show that the effectiveness uncertainty and ex-ante decisions of fixed rent and wholesale price significantly affect the mode choice and the relevant decision-making. This study provides valuable insights for e-commerce platform managers on choosing sales mode, concluding contracts with upstream manufacturers, and conducting advertising activities under asymmetric information.