International Journal of General Systems

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The introduction strategy of the emerging online

marketplace considering risk attitude and channel
power

Huiru Chen, Yifei Hao & Yingchen Yan

To cite this article: Huiru Chen, Yifei Hao & Yingchen Yan (2020) The introduction strategy of
the emerging online marketplace considering risk attitude and channel power, International
Journal of General Systems, 49:5, 470-496, DOI: 10.1080/03081079.2020.1748617

To link to this article: https://doi.org/10.1080/03081079.2020.1748617

Published online: 09 Apr 2020.

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INTERNATIONAL JOURNAL OF GENERAL SYSTEMS
2020, VOL. 49, NO. 5, 470–496
https://doi.org/10.1080/03081079.2020.1748617

The introduction strategy of the emerging online marketplace

considering risk attitude and channel power
Huiru Chen a , Yifei Haob and Yingchen Yan c

a College of Mathematics and Statistics, Huanggang Normal University, Hubei, People’s Republic of China;
b College of Mathematics and Statistics, Chongqing Technology and Business University, Chongqing, People’s
Republic of China; c School of Economics and Management, Beihang University, Beijing, People’s Republic of
China

ABSTRACT ARTICLE HISTORY

With the development of online retailing, traditional online platforms Received 28 September 2019
have begun to offer a novel online marketplace format that brings Accepted 18 March 2020
many advantages but also gives rise to problems such as operational KEYWORDS
risks and changes in channel power. This paper studies whether the Online marketplace; risk
e-tailer and manufacturer can reach a consensus on introducing the attitude; channel power;
marketplace channel and obtains the following insights. First, the uncertain environment
manufacturer always prefers to introduce the online marketplace in
the model where she acts as the leader. The e-tailer has the same pref-
erence for the online marketplace when he moves later or simulta-
neously with the manufacturer. Second, as the participants become
more risk-averse, the manufacturer and e-tailer would be less willing
to introduce the online marketplace, and it would be more difficult
to realize the equilibrium strategy under all power structure models.
Third, by combining the cross-effect of the attitude towards risks and
the power structure, we find that when the participants prefer risks
and the e-tailer has strong channel power, it would be much easier
for the two parties to reach a consensus about introducing the online
marketplace.

1. Introduction
In recent years, traditional online retailers that originally acted as dealers have begun to
provide sales services in the form of online marketplaces, which allow upstream manufac-
turers to access their customers via retail websites after charging a fee for access, giving rise
to the “reseller-to-marketplace” model (Ryan, Sun, and Zhao 2012; Hagiu and Wright 2015;
Abhishek, Jerath, and Zhang 2016; Tian et al. 2018; Yan, Zhao, and Xing 2019). For instance,
Amazon, Sears, Kindle, the iBook Store, Alice, the Alibaba Group, eBay, Premium Outlets,
Alibaba and Simon Walls of the Simon Property Group, among others, have adopted this
sales model (Hagiu and Wright 2015). Specifically, Amazon was initially a pure reseller
but began to promote an open third-party platform (a marketplace) on a large scale in
2001. Similarly, Buy.com, founded in 1997, was a pure online reseller; however, beginning
in 2006, it began to debote extensive effort towards expanding the market. By 2010, it had

CONTACT Yifei Hao haoyf@ctbu.edu.cn

© 2020 Informa UK Limited, trading as Taylor & Francis Group

 INTERNATIONAL JOURNAL OF GENERAL SYSTEMS 471

become a combination of distributed reseller and marketplace. In 2013, it was rebranded

as Rakuten.com shopping and was reported to be moving towards an entirely marketplace
format.
In addition to the e-tailers’ sales offerings, an increasing number of manufacturers are
beginning to adopt marketplaces to intensify their competitiveness. The success of online
marketplaces is well documented. Direct sales from manufacturers accounted for 45% of
units sold on Amazon.com in the second quarter of 2015, and the leading Chinese online
retailer JD.com reported that sales through its online marketplace grew at a rate higher
than its projection at 40% (Tian et al. 2018).
The introduction of the online marketplace channel will also bring new problems: one
factor that cannot be ignored is the operational risk in the supply chain. The uncertainty
of external demand or sales costs will bring about an imbalance between demand and sup-
ply, which will lead to substantial risks in supply chain management. Specifically, a supply
chain is a market demand-oriented system that is based on demand forecasting. However,
due to the volatility of market demand, it is difficult to predict market conditions and cus-
tomer preferences, which leads to increasingly significant operational risks for the supply
chain, such as the first generations of computers, medical devices and drugs entering the
market (Chen et al. 2017a). Others, such as supply uncertainty and customer evaluation
uncertainty, see reference (Li and Yu 2016; Jin et al. 2019). Therefore, this uncertainty risk
will directly affect how the supply chain members look upon introducing the marketplace
channel.
In addition, the channel’s power structure will affect both the retailer’s and manufac-
turer’s decisions regarding the marketplace channel. From a single business perspective,
most companies generally want to become channel leaders and gain a large share of the
supply chain’s profits (Choi, Li, and Xu 2013; Shi, Zhang, and Ru 2013). Traditionally, many
manufacturers have enjoyed sufficient power to become channel leaders, and they would
anticipate the response of the e-tailers before making a decision. However, the growing
strength of retailers such as Walmart, Home Depot, Tesco and Best Buy leads to symmetric
and even retailer-led channel power structures (Gao et al. 2016). Therefore, it is necessary
to develop a deeper understanding of the impact of a channel’s power structure on optimal
quantity decision-making, pricing decisions, and profitability.
Inspired by the above development, this paper puts forward and answers the follow-
ing three questions: First, when would the e-tailer and the manufacturer be more willing
to introduce the online marketplace? Then, how would the channel power of partici-
pants affect their preferences for channel structure? Third, under what conditions can the
manufacturer and e-trailer both benefit from extra channels and reach a win-win by intro-
ducing the online marketplace? Fourth, how would the two parties’ attitudes towards risks
influence the balance result and Pareto region?
To address these questions, we establish an online dual-channel supply chain, where
the manufacturer chooses the online marketplace to supplement traditional e-commerce
channels. That is, the manufacturer can not only sells products via online retail stores but
also consider introducing an online marketplace channel to increase profits. In this paper,
we apply uncertain variables to describe the dynamic demand and the uncertain sales cost
and confidence level to describe the risk attitudes of the manufacturer and the e-tailer,
respectively. Then, we study two scenarios: in the first scenario, the manufacturer does not
introduce the online marketplace channel, but in the second scenario, the manufacturer
472 H. CHEN ET AL.

does introduce the online marketplace channel. Furthermore, when introducing market
channels, we consider three cases to explore the effects of different arrangements of chan-
nel power: the simultaneous-decision case (SS); the manufacturer-as-leader case (LF); and
the-e-tailer-as-leader case (FL). After solving and comparing these cases, we obtain the
following managerial insights regarding online platform sales.
First, the manufacturer always prefers to introduce the online marketplace channel in
model FL; the e-tailer has the same preference for introducing the online marketplace
strategies. To be specific, in model SS and model LF, when the platform fee rate is low
and the channel demand difference (marketing capacity difference) is small, introducing
the online marketplace channel would bring Pareto improvement to the manufacturer and
the e-tailer. In addition to this case, in model FL, for any given platform fee, the two parties
would also prefer to introduce the online marketplace channel when the demand difference
is large.
Second, as the participants become more risk-averse, the areas of each equilibrium strat-
egy in the three power structure game models will decrease. The manufacturer and the
e-tailer would be less willing to introduce the online marketplace under these three mod-
els, and it would be harder to realize the equilibrium strategies under all power structure
models. Specifically, when the demand difference is small, the risks would have an obvious
impact on which strategy is choosen.
Finally, we can find that, combined with the cross-effect of risk attitude and the channel
power, the Pareto zones in the three models are non-empty, and they appear when the
confidence level is low and the channel demand difference is small. Therefore, it would be
much easier for the two parties to reach a consensus on whether to introduce the online
marketplace when the participants prefer risks and the e-tailer has strong channel power.
In the following, we first analyse the benchmark case where the manufacturer only sells
products through the e-tailer in Section 4, and we then discuss the case in which the man-
ufacturer launches an online marketplace and sells products to customers through two
channels in Section 5. Section 6 analyses the strategy of introducing the online channel by
comparing the profits of both parties when the online marketplace is introduced and when
it is not introduced.

2. Literature review
Our research is connected with the literature in the following aspects: (i) dual-channel
distribution, specifically the strategic choice between the reseller and marketplace channel;
(ii) supply chain power structure; and (iii) risk management. Then, we will explain how our
work is linked to these streams of the literature.
Dual-channel distribution is widely studied in works on the operation and management
of supply chains, mainly related to issues such as pricing strategies, product and stock
strategies, retail service, coordinating a dual-channel supply chain, information sharing,
and the addition of a channel. As for the summary of the related literature, please refer to
(Chen, Zhang, and Sun 2012; Cao, So, and Yin 2016; Yoon 2016; Yan, Zhao, and Liu 2018;
Yan, Zhao, and Xing 2019; Le, Zhang, and Ren 2018; Liu, Zhou, and Chen 2018; Yang, Luo,
and Zhang 2018). Our work focuses on the specific branches of these situations, namely, the
literature of the strategic choice between the reseller and marketplace mode. Ryan, Sun, and
Zhao (2012) proposes that the ability to make sales through an online platform can appeal
 INTERNATIONAL JOURNAL OF GENERAL SYSTEMS 473

to more customers on the manufacturer’s own website but she needs to pay a cost such as a
fixed admission fee or a proportional fee charged by the platform. Hagiu and Wright (2015)
explores the choice between marketplace and reseller modes among n (n > 1) independent
manufacturers and a monopolist intermediary. Abhishek, Jerath, and Zhang (2016) stud-
ies when the marketplace sales model should be used instead of the more traditional resale
model and finds that the marketplace is more efficient than the reseller channel and can
result in lower retail prices. Yan, Zhao, and Xing (2019) explores the case in which manu-
facturers directly sell products through the marketplace, in addition to the reseller channel,
with the dual upstream disadvantages of sales efficiency and demand information and finds
that manufacturers, e-tailers and consumers can achieve a win-win-win outcome. Tian
et al. (2018) considers two competing manufacturers that sell products via two alterna-
tive supply chains through a common online middleman and focuses on the mutual effect
between fulfilment cost and competitive intensity in the upstream. For the rest, please refer
to (Tan and Carrillo 2017; Chen et al. 2019). Our research is distinct from the abovemen-
tioned studies ones in two aspects. First, we consider the demand difference between the
two channels, which is a key factor since customers tend to favour products sold through
the reseller channel. Second, we also account for the uncertainties in demand and selling
cost since market demand and the cost of sales usually fluctuate in practice.
Our research also relates to the literature investigating the impacts of different market
power structures on supply chain members’ pricing, demand and revenues in a dual-
channel retail environment. Cai, Zhang, and Zhang (2009) studies the impact of price
discount contracts on the coordination of a dual-channel supply chain under different
power structures. Shi, Zhang, and Ru (2013) studies the impact of power structure and
demand uncertainty on supply chain members’ performance. Wang, Sun, and Zhan (2017)
analyses the influence of three power structures on the prices, demands and profits of sup-
ply chain members in a supply chain consisting of a single offshore manufacturer and a
single cross-border e-commerce group with offline and offline channels. Wang, Niu, and
Guo (2013) and Niu, Wang, and Guo (2015) explore competition in a supply chain includ-
ing an original equipment manufacturer (OEM) and a contract manufacturer (CM) and
investigate the two parties’ Stackelberg leadership/followership decisions through compet-
itive games with various action sequences. Zhang, Fang, and Wang (2015) explores the
influence of a manufacturer-led Stackelberg game, retailer-led Stackelberg game and simul-
taneous Nash game on the direct sales channel prices, demand and returns of traditional
retail channels and manufacturers. Gao et al. (2016) constructs a closed-loop supply chain
consisting of a manufacturer and a retailer and studies the effects of two types of Stack-
elberg games and Nash game power structures on manufacturers’ recycling efforts, retail
sales efforts, pricing and earnings. In contrast to these studies, our work explores the struc-
ture of a dual-channel supply chain and, specifically, whether introducing the marketplace
channel will benefit the manufacturer and the e-tailer besides the original reseller channel.
We analyse the operation and management of the two channels and the impacts of different
power structures on the pricing and earnings of the members of the dual-channel supply
chain.
Our research is also related to the literature on risk management to a certain extent.
Since the 1990s, researchers from the fields of operations management, finance, account-
ing, and corporate management have conducted many quantitative and qualitative studies
on supply chain risk-management issues. There are three main methods for capturing
474 H. CHEN ET AL.

supply chain risk management: the mean-variance method, risk value method, and con-
ditional risk value method. Since the introduction of uncertainty theory by Liu (2007),
the use of reliability decision criteria to describe uncertain risks, and further analysis of
the impact of risk on decision-making. This approach to risk management involves intro-
ducing confidence levels to characterize participants’ attitudes towards risk when making
decisions. Wu, Zhao, and Tang (2014) considers a class of principal-agent problems with
multidimensional incomplete information and solves them based on confidence level deci-
sion rules. Liu et al. (2017) uses the confidence level to study the contract design issues of
two competing heterogeneous manufacturers and one co-retailer under uncertain infor-
mation. Chen et al. (2017b) discusses the cost of sales as an uncertain variable and its
impact on the optimal sales strategies of heterogeneous retailers. Chen et al. (2018a) stud-
ies how the order of moves among supply chain members influences outsourcing decisions
based on confidence levels. As for additional relevant works, please see (Chen et al. 2018b;
Chen, Lan, and Zhao 2018c; Li and Liu 2019; Yang, Liu, and Yang 2019). Compared to
these papers, our study regards both the market potential and the manufacturer’s produc-
tion costs as uncertain variables. Concretely speaking, we use reliability decision criteria
to study the strategies for introducing novel marketplace channels.
Our research on the manufacturer’s and e-tailer’s choices of strategic models differs from
the existing marketplace channel literature in four main respects. First, previous research
regards the e-tailer only as a reseller. In our research, in the online marketplace model, the
e-tailer acts as a platform and charges a fee on each transaction. Second, unlike some of
the literature exploring when to choose the resale and marketplace channels, our research
focuses on the impacts of the introduction of this novel online marketplace channel on both
the manufacturer and e-tailer and, especially, whether and when the two parties can achieve
a “win-win” outcome. Third, we study how channel power and the operational risks (two
important but hitherto unexplored factors) determine the choice of model configurations.
Fourth, instead of using traditional risk-management tools, we propose an entirely new
tool to fully consider the uncertain environment caused by demand and cost in the supply
chain. Under uncertainty theory, the reliability decision criterion is used to describe the
uncertain risk, and then we analyse the impact of this risk on decision-making.

3. Model framework
In this section, we set up the model, which includes an e-tailer (he) and a manufacturer
(she). For the remainder of this study, we denote the manufacturer by m and the e-tailer
by e. Next, we present the channel structure and demand function. Then, we identify the
parties’ maximum profits under the given confidence levels.
Channel structure. The manufacturer and e-tailer first collaborate in the wholesale mode,
where the e-tailer purchases products from the manufacturer at a fixed wholesale price
w and then sells them to online consumers. The e-tailer then starts to provide a market-
place platform through which the manufacturer can sell her products directly to online
consumers by paying a fraction λ ∈ (0, 1) of the profit as the platform fee. For instance,
Amazon’s webpage titled “Selling on Amazon Fee Schedule” indicates that the reference fee
percentage is 15% for many product categories, such as beauty, clothing and accessories,
toys and games, and outdoors, and 8% for other categories such as cell phone devices and
 INTERNATIONAL JOURNAL OF GENERAL SYSTEMS 475

consumer electronics (Wang, Leng, and Liang 2018). JD.com charges 7% for clothes and
shoes, 6% for luxury items, and 5% for sporting goods (Yan, Zhao, and Liu 2018). Such a
fee structure is widely adopted in practice, such as on Amazon Marketplace, Travelocity,
Alice, the iPhone App Store, the iBook Store and Kindle, and in the literature.
Demand function. We suppose that the manufacturer and the e-tailer face a linear,
downward-sloping, inverse demand function when the manufacturer launches the online
marketplace

pm (qm , qe ; η) = η − b(qm + qe ) and pe (qm , qe ; η) = tη − b(qm + qe ),

where pi (i = m, e) denotes the retail prices of the products charged by firm i, η repre-
sents market potential, which is an uncertain variable with the uncertainty distribution
(·), and t > 1 is an exogenous parameter that captures the demand difference between
the traditional reseller channel and the online marketplace channel. Note that although the
products are manufactured by the same manufacturer, the products sold through different
channels can bring consumers various utilities and thereby give rise to channel preferences.
For example, different sellers would provide different services, guarantees, and return poli-
cies. Therefore, we allow a larger potential demand in the e-tailer channel than in the direct
online channel. Furthermore, b ∈ (0, 1] captures the quantity sensitivity, and qi is the pro-
duction quantity of firm i. Such a linear demand function often appears in the literature on
economics and supply chain management (Niu, Wang, and Guo 2015; Fanti 2016).
Sales cost. We assume that the manufacturer incurs a selling cost ξ for every unit of product
sold through the direct online marketplace, but we normalize the e-tailer’s selling cost as 0.
The manufacturer’s higher direct selling cost could be due to inexperience, a lack of con-
sumer knowledge, or the additional cost of e-commerce. As the selling cost is often unstable
and uncontrollable, ξ is also characterized as an uncertain variable with the uncertainty
distribution (·). Furthermore, note that the two uncertain variables η and ξ are inde-
pendent. They are widely considered in the literature (Yang, Zhao, and Lan 2014; Chen
et al. 2017b; Liu et al. 2017) on uncertain environments.
The manufacturer’s profit. If the manufacturer adopts the online marketplace provided
by the e-tailer, the manufacturer will not only sell products through the e-tailer but also
directly sell products through the online marketplace. She can earn profits

u(qm , qe , w; η, ξ ) = (1 − λ)(pm − ξ )qm + wqe ,

in which the first part, (1 − λ)(pm − ξ )qm , indicates her benefits from directly selling
products through the online marketplace, and the second part, wqe , represents the gains
made by the manufacturer from selling her products via the e-tailer. With fickle market
conditions and intense competition, the manufacturer’s total revenue u(qm , qe , w; η, ξ ) is
also an uncertain variable, which includes two uncertain variables η and ξ . Based on the
critical value criterion used by Wu, Zhao, and Tang (2014) and Chen et al. (2018a), we
set the confidence level α ∈ [0, 1] to indicate the manufacturer’s risk attitude during the
decision-making process. The manufacturer will become more conservative as α increases.
Conversely, the manufacturer is more risk-loving and burdens more potential risk when
α decreases. Specifically, when α = 0, the manufacturer is entirely risk-loving; and when
476 H. CHEN ET AL.

α = 1, she is totally risk-averse. Readers who are interested in this can consult Chen
et al. (2018b) and Liu (2010) for details. Next, given the confidence level α, the α-profit
of the manufacturer is defined as
  
um (qm , qe , w; α) = max u0  M{u(qm , qe , w; η, ξ )  u0 }  α , (1)

where u0 represents the manufacturer’s earnings under confidence level α. The manufac-
turer intends to maximize her profits u0 under an acceptable confidence level.
The e-tailer’s profit. The e-tailer’s profit is given by

v(qm , qe , w; η, ξ ) = λ(pm − ξ )qm + (pe − w)qe ,

which can be divided into two parts: the first part, λ(pm − ξ )qm , represents the revenue that
he obtains from the manufacturer from the platform fees obtained by online marketplace,
and the other part, wqr stands for what he receives from his sales in the online consumer
market. v(qm , qe , w; η, ξ ) is also an uncertain variable that includes the uncertain variables
η and ξ . Similar to the case for the manufacturer, replacing the expected utility, we denote
β ∈ [0, 1] as the e-tailer’s confidence level. Thus, considering his confidence level, the β-
profit of the e-tailer can be written as
 
vm (qm , qe , w; β) = max v0 | M{v(qm , qe , w; η, ξ )  v0 }  β , (2)

where v0 represents the competitive e-tailer’s income under confidence level β. Further-
more, to simplify the calculations, we suppose that both of them have the same confidence
level (i.e. β = α); therefore, all members in the supply chain have the same confidence
level.

4. No marketplace channel (Case N)

In this section, we analyse the case in which the e-tailer does not offer online marketplace
services and acts only as only a reseller for the manufacturer. The sequence of events is as
follows. First, the manufacturer sets the wholesale price w in order to maximize her profits.
After learning the wholesale price offered by the manufacturer, the e-tailer determines the
quantity qe to maximize his own profits and sells the products to online customers. Specif-
ically, let subscript “N” denote the equilibrium solutions when the agency selling channel
is not introduced, and we establish the following model with confidence levels.

max um (qN
e (w; α), w)
w0

subject to: (3)

qN
e (w; α) = arg max vm (qe , w; α).
qe 0

Based on the reliability decision criterion, the above model can be rewritten as follows.
 INTERNATIONAL JOURNAL OF GENERAL SYSTEMS 477

Theorem 4.1: Model (3) can be equivalently turned into

max u(qN
e (w; α), w)
w0

subject to: (4)

−1
qN
e (w; α) = arg max v(qe , w;  (1 − α)).
qe 0

In Equation (4), the inverse distribution −1 (1 − α) represents the online consumer
market capacity under the given confidence level α. We call this belief-degree market
capacity of the consumer market under confidence level α (the market’s belief-degree
capacity, for short). The belief-degree market capacity depends only on and decreases with
the confidence level given the distribution functions of uncertain market capacity; that is,
a risk-loving decision maker holds that the market’s belief-degree capacity −1 (1 − α) is
greater; contrarily, a risk-averse decision-maker would hold that the market’s belief-degree
capacity is smaller. We solve this subgame through backward induction, and the optimal
decisions of the manufacturer and e-tailer are described in the following proposition.

Proposition 4.1: If the agency selling channel is not introduced, the optimal decisions are as
follows.

(i) The optimal order quantity of the e-tailer and the wholesale price of the manufacturer
are
t−1 (1 − α) t−1 (1 − α)
qN
e = , wN = .
4 2
(ii) The e-tailer’s and the manufacture’s corresponding optimal α-profits are
 2  2
N t −1 (1 − α) N t−1 (1 − α)
v = , u = .
16 8

Proposition 4.1 presents the optimal decisions and profits of the manufacturer and e-
tailer when the former does not introduce an online marketplace channel. It turns out
that the decisions and profits of the two parties relate not only to the demand difference t
between the two channels but also to the players’ attitudes α towards risks when making
decisions. The effect of t is in line with our intuition: the e-tailer can gain more sales from
the larger sales advantage in demand. The wholesale price of the manufacturer and the
profits of both are also positively correlated with the demand difference t. Regarding the
confidence level α, all of the equilibrium decisions decrease as α increases. This is because
the larger α is, the more risk-averse players become (i.e. have higher confidence levels)
when making decisions, leading to lower production. Conversely, higher risk levels (i.e.
lower confidence levels) are linked with higher order quantities and profits.

5. Marketplace channel
In this section, we premise that the e-tailer cooperates with the manufacturer through two
channels – the reseller and marketplace channel. Furthermore, since the manufacturer and
478 H. CHEN ET AL.

the e-tailer may in practice have different channel powers, we consider three possible deci-
sion sequences. They can make quantity decisions either “simultaneously” or “sequentially
(leader-follower)”. Next, we first reveal the subgame equilibrium outcomes for the these
three models and then probe the timing preferences of the manufacturer and the e-tailer
in the presence of the marketplace channel.

5.1. Three decision structures

When the manufacturer introduces the online marketplace channel, she decides the quan-
tity qm she will sell to consumers. We examine the model under three supply chain power
structures: the manufacturer and the e-tailer simultaneously determine product quantities,
which we call the simultaneous-decision case (SS); the manufacturer sets the quantity in
the direct sales channel before the e-tailer orders, which we call the manufacturer-as-leader
case (LF); and the manufacturer determines sales quantity after the e-tailer does, which we
call the-e-tailer-as-leader case (FL).

5.1.1. Simultaneous-decision case (Case SS)

Here, we examine the case in which the manufacturer and the e-tailer play a simultaneous
game. In this case, under a given confidence level, the manufacturer first announces her
wholesale price, then they simultaneously choose their corresponding order quantities.
Given the α-profit of the manufacturer and α-profit of the e-tailer, we can establish the
following model under the given confidence levels.

max um (qSS SS
m (w; α), qe (w; α), w; α)
w0

subject to:
(5)
qSS
e (w; α) = arg max vm (qm , qe , w; α)
qe 0

qSS
m (w; α) = arg max um (qm , qe , w; α).
qm 0

Based on the reliability decision criterion, the above model can be rewritten as follows.

Theorem 5.1: Model (5) can be equivalently turned into the following one
−1 −1
max u(qSS SS
m (w; α), qe (w; α), w;  (1 − α),  (α))
w0

subject to:
−1 −1 (6)
qSS
e (w; α) = arg max v(qm , qe , w;  (1 − α),  (α))
qe 0

qSS
m (w; α) = arg max u(qm , qe , w; −1 (1 − α),  −1 (α)).
qm 0

Under the given confidence level α, −1 (1 − α) represents the manufacturer’s belief-
degree market capacity, and  −1 (α) represents the manufacturer’s belief-degree sales cost.
 −1 (α) depends only on and increases with the confidence level given the distribution
functions of the uncertain cost, that is, a risk-averse manufacturer’s belief-degree cost is
 INTERNATIONAL JOURNAL OF GENERAL SYSTEMS 479

higher, whereas a risk-loving manufacturer’s belief-degree cost is lower. From the above
theorem, we can conclude the optimal decisions of the manufacturer and the retailer in
this case, as presented in the following proposition.
Proposition 5.1: In Case SS, the equilibrium decisions are as follows:

(i) The e-tailer’s optimal sales quantity and the manufacturer’s optimal direct selling quan-
tity and wholesale price are
 
SS 2 (t − 1)−1 (1 − α) +  −1 (α)
qe = ,
b(5 − λ)
(λ + 2t − 7)−1 (1 − α) + (7 − λ) −1 (α)
qSS
m = ,
b(λ − 5)
(λ2 − 6λ + 4t + 1)−1 (1 − α) − (λ2 − 6λ + 1) −1 (α)
wSS = .
2(5 − λ)
(ii) The supply chain parties’ α-profits are
 
(t − 1)a +  −1 (α) (λ2 − 7λ + 4) −1 (α)

−(λ2 + 2λt − 7λ − 4t + 4)−1 (1 − α)
vSS =
b(λ − 5)2
 2
λ (λ + 2t − 7)−1 (1 − α) − (7 − λ) −1 (α)
+ ,
4b(λ − 5)2
 
(t − 1)−1 (1 − α) +  −1 (α) (λ2 − 6λ + 4t + 1)−1

(1 − α) − (λ2 − 6λ + 1) −1 (α)
uSS =
b(λ − 5)2
 2
(1 − λ) (λ + 2t − 7)−1 (1 − α) − (7 − λ) −1 (α)
+ .
4b(λ − 5)2
Note that the case exists only when max{t 1 , 1} < t < t 1 , in which t 1 = (6λ − λ2 − 1)
(−1 (1 − α) −  −1 (α))/4−1 (1 − α) and t 1 = (7 − λ)(−1 (1 − α) −  −1 (α))/
2−1 (1 − α).

Proposition 5.1 summarizes the analytical expressions for the optimal solutions under
the simultaneous decision model. If the manufacturer prefers to introduce the online mar-
ketplace channel, the demand difference t must be within a certain range and not be too
high; that is, t  t 1 . Otherwise, the manufacturer will find it difficult to survive in the con-
sumer market. This is because, on the one hand, the more different the two channels are
from each other, the greater the sales advantage the e-tailer holds, which harms the manu-
facturer. On the other hand, we find that t 1 decreases with her confidence level parameter
α. Note that as the manufacturer becomes more risk-loving (i.e. the confidence level gets
lower), although the manufacturer’s belief-degree cost in the direct channel decreases, the
lower confidence level will lead to an increase in the demand difference between the two
channels; therefore, she would still refuse to enter the online marketplace.
480 H. CHEN ET AL.

5.1.2. Manufacturer-as-leader case (Case LF)

In this section, we analyse the situation in which the manufacturer plays the dominant role
and becomes the leader of the Stackelberg game. The order of events is as follows. Given
the confidence level, after the manufacturer determines the wholesale price of the product,
she will set the quantity of products sold directly to online customers through the online
marketplace, and the e-tailer will then determine the quantity of products he orders. When
customer demand is realized, the two participants obtain their revenues.
Given the α-profit of the manufacturer and α-profit of the e-tailer, we can establish the
following model under the given confidence levels.
⎧
⎪
⎪ max um (qLF
m (w; α), w; α)
⎪
⎪ w0
⎪
⎪
⎪
⎪
⎨ where qm (w; α) solves problems
LF
⎪
⎧
um (qm , qLF (7)
⎪ ⎪
⎪ qmax e (qm , w; α), w; α)
⎪
⎪ ⎨ m 0
⎪
⎪
⎪
⎪ subject to:
⎪
⎪ ⎪
⎪
⎩ ⎩ e (qm , w; α) = arg max vm (qm , qe , w; α).
qLF
qe 0

Based on the reliability decision criterion, the above model can be rewritten as follows.

Theorem 5.2: Model (7) can be equivalently turned into the following one
⎧ −1 −1
⎪
⎪ max u(qLF
m (w; α), w;  (1 − α),  (α))
⎪
⎪ w 0
⎪
⎪
⎪
⎪
⎨ where qm (w; α) solves problems
LF
⎪
⎧ −1 −1
⎪ ⎪
⎪ max u(qm , qLF
e (qm , w; α), w;  (1 − α),  (α))
(8)
⎪
⎪ ⎨ q 0
⎪
e
⎪
⎪ subject to:
⎪
⎪ ⎪
⎪
⎩ ⎪
⎩ −1 −1
e (qm , w; α) = arg max v(qm , qe , w;  (1 − α),  (α)).
qLF
qe 0

To solve this subgame we use the backward induction and the results of this model are
presented in the proposition below.

Proposition 5.2: In Case LF, the equilibrium decisions are as follows:

(i) The e-tailer’s optimal order quantity and the manufacturer’s optimal direct sell quantity
and wholesale price are
 
(λ − 1) (t − 1)−1 (1 − α) +  −1 (α)
qLF
e = ,
2b(2λ − 1)
(2λ + t − 2)−1 (1 − α) + 2(1 − λ) −1 (α)
qLF
m = ,
2b(2λ − 1)
 
LF (2λ − t)−1 (1 − α) − 2λ −1 (α) (1 − λ)
w = .
2(2λ − 1)
 INTERNATIONAL JOURNAL OF GENERAL SYSTEMS 481

(ii) The α-profits of the supply chain parties are

 −1 (1 − α) + (1 − λ) −1 (α)

(λ − 1) (λ  + t − 1) 
(t − 1)−1 (1 − α) +  −1 (α)
vLF =
4b(2λ − 1)
 −1 −1

 (2λ + t − 2)−1 (1 − α) − 2(λ − 1)−1 (α)
(λt − 3λ + 1) (1 − α) + (3λ − 1) (α) λ
− ,
4b(2λ − 2)2
  
(λ − 1)2 (t − 1)−1 (1 − α) +  −1 (α) (t − 2λ)−1 (1 − α) + 2λ −1 (α)
uLF =
4b(2λ − 1)2
 −1 (1 − α) − 2(λ − 1) −1 (α)

(λ − 1) (2λ + t − 2) 
(λt − 3λ + 1)−1 (1 − α) + (3λ − 1) −1 (α)
+ .
4b(2λ − 1)2

Note that the case exists only when λ < 12 and max{t 2 , 1} < t < t 2 , in which t 2 =
2λ(−1 (1 − α) −  −1 (α))/−1 (1 − α) and t 2 = 2(1 − λ)(−1 (1 − α) −  −1 (α))/
−1 (1 − α).

Proposition 5.2 provides the equilibrium outcome of the situation where the manufac-
turer has greater channel power and determines her quantity earlier. Unlike the previous
case, we find when λ  12 , the e-tailer is unwilling to resell goods for the manufacturer
because the e-tailer, who is at a disadvantage in later actions, faces high costs from pro-
viding a platform for the manufacturer. Furthermore, t shouldn’t exceed the threshold t 2 ,
and t 2 also decreases with the confidence level, i.e. in model LF, as the manufacturer’s risk-
aversion increases, she becomes more willing to introduce the marketplace channel only if
the demand difference is small and the platform fee is low.

5.1.3. E-tailer-as-leader case (Case FL)

Under this case, before the manufacturer determines her product quantity to sell, the
e-tailer would fix the order quantity. Similar to the previous two models, the optimiza-
tion problem is solved by backward induction. Given the α-profit of the participants’ and
confidence levels, we can establish the following model.

⎧
⎪
⎪ max um (qFL
e (w; α), w; α)
⎪
⎪ w0
⎪
⎪
⎪
⎪ FL
⎨ where qe (w; α)solves problems
⎪
⎧
max vm (qFL (9)
⎪ ⎪
⎪ m (qe , w; α), qe , w; α)
⎪
⎪ ⎨ qe 0
⎪
⎪
⎪
⎪ subject to :
⎪
⎪ ⎪
⎪
⎩ ⎩ m (qe , w; α) = arg max um (qm , qe , w; α).
qFL
qm 0

Based on the reliability decision criterion, the above model can be rewritten as follows.
482 H. CHEN ET AL.

Theorem 5.3: Model (9) can be equivalently turned into the following one
⎧ −1 −1
⎪
⎪ max u(qFL
e (w; α), w;  (1 − α),  (α))
⎪
⎪ w 0
⎪
⎪
⎪
⎪ FL
⎨ whereqe (w; α)solvesproblems
⎪
⎧ −1 −1
max v(qFL (10)
⎪ ⎪
⎪ m (qe , w; α), qe , w;  (1 − α),  (α))
⎪
⎪ ⎨ q 0
⎪
⎪
e
⎪
⎪ subject to:
⎪
⎪ ⎪
⎪ −1 −1
⎩ ⎩ m (qe , w; α) = arg max u(qm , qe , w;  (1 − α),  (α)).
qFL
qm 0

To solve this subgame we use the backward induction. The following proposition
characterizes the equilibrium outcomes.

Proposition 5.3: In Case FL, the equilibrium decisions are as follows:

(i) The e-tailer’s optimal order quantity and the manufacturer’s optimal direct sell quantity
and wholesale price
 
FL 2 (t − 1)−1 (1 − α) +  −1 (α)
qe = ,
b(3 − λ)
(λ + 2t − 5)−1 (1 − α) − (5 − λ) −1 (α)
qFL
m = ,
2b(λ − 3)
(λ2 − 4λ + 2t + 1)−1 (1 − α) − (λ2 − 4λ + 1) −1 (α)
wFL = .
2(3 − λ)
(ii) Correspondingly, the supply chain parties’ α-profits are
 
 2 (t − 1)−1 (1 − α) +  −1 (α) 
FL (λ − 5λ + 2) −1 (α) − (λ2 + 2λt − 5λ − 2t + 2)−1 (1 − α)
v =
b(λ − 3)2
 2
(λ + 2t − 5)−1 (1 − α) − (5 − λ) −1 (α)
+ ,
4b(λ − 3)2
 
 2 (t − 1)−1 (1 − α) +  −1 (α) 
FL (λ − 4λ + 2t + 1)−1 (1 − α) − (λ2 − 4λ + 1) −1 (α)
u =
b(λ − 3)2
 2
(λ + 2t − 5)−1 (1 − α) − (5 − λ) −1 (α) (λ − 1)
− .
4b(λ − 3)2

Note that the case exists only when max{t 3 , 1} < t < t 3 , in which t 3 = (4λ − λ2 − 1)
(−1 (1 − α) −  −1 (α))/2−1 (1 − α) and t 3 = (5 − λ)(−1 (1 − α) −  −1 (α))/
2−1 (1 − α).

Proposition 5.3 describes the equilibrium solution in the e-tailer-as-leader model. The
manufacturer’s threshold for introducing the online marketing channel is t 3 , and how
 INTERNATIONAL JOURNAL OF GENERAL SYSTEMS 483

the threshold changes with the confidence level α is analogous to those in Model SS and
Model FL. In addition, we compare the threshold value of the online marketing channel
introduced by the manufacturer in the three basic models and obtain t 2 < t 3 < t 1 , indi-
cating that in Model SS, the demand difference that the manufacturer can accept when
introducing the online marketplace is larger than those in the other two models. Com-
bined with t 3 < t 1 < t 2 , it indicates that the range of demand difference is smallest in the
e-tailer-as-leader model.

5.2. Equilibrium leadership strategy

Having derived the results in Section 5, now we investigate the effects of leadership deci-
sions by comparing the equilibrium outcomes of the three games. We first compare the
wholesale prices of the manufacturer, as presented in the following proposition 5.4.

Proposition 5.4: The comparison of the manufacturer’s wholesale prices under three games
shows wFL < wSS < wLF .

Proposition 5.4 compares the manufacturer’s wholesale prices among the simultane-
ous decision model, the manufacturer-as-leader model and the e-tailer-as-leader model.
The result reveals that the manufacturer’s optimal wholesale price is the highest in the
manufacturer-as-leader game and the lowest in the e-tailer-as-leader game. This result
indicates that, as the manufacturer becomes more powerful in the supply chain, the whole-
sale price also increases. This means that a manufacturer that dominates quantitative
decisions is more likely to leverage the power of her supply chain to balance the economic
benefits of the resale and direct channels.
Next, we compare the quantities of the e-tailer and the manufacturer under three basic
models.

Proposition 5.5: The comparisons of the quantities under three basic models are as follows.
√
e < qe < qe when the
(i) For the e-tailer, we have qSS √ platform fee rate 0 < λ < 5 − 2,
LF FL

and qe < qe < qe when the platform fee rate 5 − 2 < λ < 12 .
SS FL LF

m < qm < qm all the time.

(ii) For the manufacturer, we have qLF FL SS

Proposition 5.5 compares the e-tailer and manufacturer’s quantities when the latter
introduces the online marketplace. In Proposition 5.5, the e-tailer’s quantities √ in three
basic games depend on the platform fee rate λ. When λ is small (i.e. 0 < λ < 5 − 2), the
e-tailer orders the largest quantity in the model in which he sets his quantity first, which
conforms to the traditional model of competition on quantity. Note that a low platform fee
means that he is able to obtain a small amount of revenue by offering the manufacturer an
online marketplace, and the e-tailer has two sources of income: one is from the platform
fee paid by the manufacturer, and the other is from reselling products. Therefore, when the
platform fee revenue is low, the e-tailer will focus more on earning from the reseller channel
and then prefers to be aggressive in competition and move first to balance his two benefits.
Furthermore, combining these findings with Proposition 5.4, we know that the wholesale
price is also the lowest in the e-tailer-as-leader model, which ensures an acceptable product
484 H. CHEN ET AL.

√
acquisition cost. As the platform fee increases (i.e. 5 − 2 < λ < 12 ), the e-tailer will pay
more attention to the gains from the platform fee and less on the profits acquired directly
through the reseller channel. Even if a high wholesale price is charged, he will still choose
to act later.
Interestingly, regardless of how large the platform fee is, a manufacturer always prefers
to move simultaneously with the e-tailer. According to the decisions made by the e-tailer,
we know that if the platform fee is relatively small, the manufacturer always wants to move
earlier. This is because if the manufacturer chooses to move later, she has to charge a lower
product price to the e-tailer, which reduces her profits from the wholesale trade. However,
if she moves first, the e-tailer will make a large order and compete aggressively with the
manufacturer. Therefore, we find that the manufacturer would receive greater benefits if
she moves simultaneously with the e-tailer.

Proposition 5.6: The comparisons of the profits are as follows:

(i) For the e-tailer, we have vSS < vFL < vLF when the platform fee rate 0 < λ < λ1 , vSS <
vLF < vFL when the platform fee rate λ1 < λ < λ2 , and vLF < vSS < vFL when the
platform fee rate λ1 < λ < λ2 .
(ii) For the manufacturer, uFL < uSS < uLF holds all the time.

Proposition 5.6 compares the profit of the e-tailer and the manufacturer under three
basic quantity decision models. This proposition tells us that the e-tailer will gain more
profit in a manufacturer-as-leader model than in a simultaneous-decision model when
the platform fee is low enough. When the fee is moderate or high, the e-tailer prefers the
e-tailer-as-leader game and enjoys a leadership advantage in determining his quantity first;
here, he obtains the largest market share and enjoys the lowest wholesale price. Note that
when the platform fee is low or moderate, the profit gained under the simultaneous deci-
sion model ranks the lowest since the e-tailer orders the smallest quantity in such a model.
Regarding the manufacturer, as shown in Propositions 5.4 and 5.5, she will set the highest

Figure 1. Comparison of the profits under three quantity decision models.

 INTERNATIONAL JOURNAL OF GENERAL SYSTEMS 485

wholesale price in the manufacturer-as-leader model and enjoys a leadership advantage to

secure a larger market share. On the contrary, her profit in the e-tailer-as-leader game is
always the lowest.
The results of Proposition 5.6 are further presented in Figure 1. Here we assume η ∼
L(a1 , a2 ), ξ ∼ L(c1 , c2 ) with 0 < a1 < a2 , 0 < c1 < c2 , where, a1 = 10, a2 = 40, c1 = 1,
c2 = 2, t = 1.5 and b = 0.6. Additionally, we set α = 0.2 in the left plot and λ = 0.38 in the
right plot. In the two graphs, the three dotted lines represent the manufacturer’s earnings,
and the three solid lines represent the e-tailer’s earnings.
The left plot of Figure 1 depicts the effect of the platform fee on the profits of both partici-
pants when the manufacturer introduces the marketplace. Given the parameters, we obtain
λ1 = 0.34 and λ2 = 0.36. These results are all consistent with Proposition 5.6. Figure 1 on
the right shows how the e-tailer and manufacturer’s profits vary with the confidence level.
From the figure, we find that, under the three models, the profits of both decrease with the
confidence level α. This implies that as the e-tailer and the manufacturer’s degree of risk
aversion increases, their profits decrease.

6. Preferences on the introduction of the online marketplace channel

This section concentrates on the preferences of the manufacturer and the e-tailer with
respect to the introduction of the online marketplace under three game models with dif-
ferent quantity decision sequences, which are each addressed in the following subsections.

6.1. Introduction strategy in the simultaneous case

First, we explore the strategy preference when the two members move simultaneously by
comparing Models SS and N, and the result is described in Proposition 6.1.

Proposition 6.1: The optimal introduction strategies when the two members move simulta-
neously are as follows:

(i) For the manufacturer, we have

• When the platform fee rate λ < λ1 , the manufacturer prefers to introduce the online
marketplace channel, i.e. uN < uSS , for t 1 < t < tm1 , she prefers not to introduce, i.e.
uN > uSS , for tm1 < t < t 1 .
• When the platform fee rate λ1 < λ < 1, the manufacturer prefers not to introduce
the online marketplace channel, i.e. uN > uSS , for any demand difference t.
(ii) For the e-tailer, we have
• When the platform fee rate λ < λ2 , the e-tailer prefers to introduce the online mar-
ketplace channel, i.e. vN < vSS for max{t 1 , 1} < t < te1 or te2 < t < t 1 , she prefers
not to introduce, i.e. vN > vSS , for te1 < t < te2 .
• When the platform fee rate λ2 < λ < 1, the e-tailer prefers to introduce the online
marketplace channel, i.e. vN < vSS , for any demand difference t.

Proposition 6.1 compares Model SS and Model N. Result (i) in Proposition 6.1 shows
the manufacturer’s optimal strategies in terms of the introduction of the online market-
place channel under different levels of the platform fee λ and demand difference t. Only
486 H. CHEN ET AL.

with a low platform fee (λ < λ1 ) and a relatively small demand difference would the man-
ufacturer like to introduce the marketplace channel. In this case, the e-tailer will compete
more aggressively since the revenue he derives from the platform fee is low. As the demand
difference increases, the e-tailer’s sale advantage also increases. A manufacturer who is not
sufficiently competitive would be better off forgoing the introduction of the marketplace
to sell directly and focus on revenue from the wholesale trade.
As the platform fee rises (λ1 < λ < 1), the e-tailer will charge a higher proportion of
the profit earned from the marketplace. In such a case, even though that the manufacturer
is competitive in downstream sales, the e-tailer would gain a bigger profit share from direct
sales. Therefore, regardless of how small the demand difference is, the manufacturer will
be unwilling to introduce the online marketplace channel.
Result (ii) in Proposition 6.1 presents the e-tailer’s optimal introduction strategies
regarding the online marketplace channel for different platform fees λ and demand dif-
ference t. When the platform fee is small (λ < λ2 ), the e-tailer will be ready to accept the
manufacturer’s desire to open a marketplace channel only when the demand difference
is large or small. When it is relatively large, the e-tailer’s choice can be easily understood.
Although the manufacturer opens the direct marketplace channel, the manufacturer is still
not sufficiently competitive. Thus, the manufacturer still needs to move output through
the reseller channel and thus will first bring down the wholesale price, which benefits the
e-tailer.
However, we also present the counterintuitive insight that an e-tailer’s without a suffi-
cient sales advantage still prefers to introduce the marketplace. At this time, the e-tailer
advantage in sales efficiency is not significant, which would cut the interests he gains from
resale. However, high sales efficiency in the marketplace enables the e-tailer to earn a higher
revenue by charging the platform fee because in Model SS, the price and quantity of prod-
ucts sold through the marketplace channel increase as t decreases. Thus the e-tailer can
earn higher profits, which induces him to accept the manufacturer’s introduction of this
channel.
When the platform fee is expensive (λ2 < λ < 1), the e-tailer always wants the man-
ufacturer to introduce the online marketplace. This is relatively straightforward. In this
case, as long as the manufacturer opens the marketplace channel, the e-tailer will enjoy
a low wholesale price. In addition, the high platform fee implies that the e-tailer can also
gain a great amount of profit from the market channel. Therefore, regardless of the demand
difference, the e-tailer is still willing to introduce the marketplace, which gives him extra
ways to obtain substantial earnings.

Remark 6.1: When the two commit to moving simultaneously, both the manufacturer
and the e-tailer prefer the manufacturer can acquire Pareto improvement by introducing
the online marketplace if λ < 
λ1 and max{t 21 , 1} < t < min{te1 , tm1 }.

To visually depict the conclusions in Proposition 6.1 and Remark 6.1, we offer a fur-
ther explanation in Figure 2. Note that “I” denotes the case in which the manufacturer or
the e-tailer prefers to introduce the marketplace channel; “N” denotes the case in which
the manufacturer or the e-tailer prefers not to open the marketplace. Therefore, “II”,
“IN”, “NN” and “NI” represent the equilibrium strategy preferred by the two parties. For
instance, “NI” means that in this area, the manufacturer would not like to introduce the
 INTERNATIONAL JOURNAL OF GENERAL SYSTEMS 487

Figure 2. Introduction strategy of the online marketplace in Case SS.

online marketplace, but the e-tailer does. In this regard, we suppose that η ∼ L(a1 , a2 ),
ξ ∼ L(c1 , c2 ) with 0 < a1 < a2 , 0 < c1 < c2 , where a1 = 10, a2 = 40, c1 = 1, c2 = 2. In
the left plot, α = 0.2; in the right plot, λ = 0.3.
Figure 2(a) illustrates the effect of the platform fee λ and the demand difference t on the
strategy as far as the marketplace channel is concerned when the two commit to moving
simultaneously. From the figure, we see that the manufacturer will decide to open the direct
online marketplace when the platform fee is relatively low (as shown on the left  λ21 , at a
given value,  λ1 = 0.464). When the demand difference is small (t < tm1 ), the e-tailer will
2

be willing to introduce the online marketplace channel when the platform fee is relatively
high. The two will reach a consensus interval when the platform fee rate is moderate (i.e.
λ ∈ (λ11 , 
λ21 ), here 
λ11 = 0.268) and the demand difference is relatively small (t is less than
the ordinate of point A = 1.143).
The graph on the right depicts the preferred strategies of both parties from a risk attitude
perspective. Observing the graph, we first find that the boundary of the function for the
demand difference gets narrower with the confidence level α. Be aware that the larger α
is, the more risk-averse the participants are. This indicates that, first, as the players’ degree
of risk-aversion increases, the area where the game exists shrinks; second, the area of each
equilibrium strategy decreases as the participants become more risk-averse.

6.2. Introduction strategy in manufacturer-as-leader case

We now compare the optimal profits in Model LF and Model N and investigate the optimal
online marketplace channel introduction strategy as described in Proposition 6.2.

Proposition 6.2: The optimal introduction strategies when the manufacturer moves first are
as follows:

(i) The manufacturer always prefers to introduce the online marketplace channel, i.e. uN <
uLF , for any demand difference t.
488 H. CHEN ET AL.

Figure 3. Introduction strategy of the online marketplace in Case LF.

(ii) For the e-tailer, we have

• When the platform fee rate λ < 13 , the e-tailer prefers to introduce the online market-
place channel, i.e. vN < vLF , for max{t 2 , 1} < t < te , she prefers not to introduce, i.e.
vN > vLF , for te < t < t 2 .
• When the platform fee rate 13 < λ < 0.5, the e-tailer prefers to introduce the online
marketplace channel, i.e. vN < vLF , for any demand difference t.

Result (i) in Proposition 6.2 illustrates that when the manufacturer can move first, she
would always like to introduce the marketplace channel. That is, the first-mover advantage
means that the manufacturer can always benefit from the introduction of the direct sales
channel. Result (ii) in Proposition 6.2 depicts the e-tailer’s optimal introduction strategies.
Here, when the platform fee is low (λ < 13 ), the e-tailer provides the platform service when
the demand difference is small and acts as only as a reseller when the demand difference is
large. This is because where the manufacturer can move first, the e-tailer cannot enjoy the
first-mover advantage because qLF e < qe .
N

Remark 6.2: When the manufacturer moves first, she and the e-tailer would prefer that
she can acquire Pareto improvement by introducing the online marketplace if λ < 
λ2 and
max{t 2 , 1} < t < min{te , t 2 }.

We depict the results of Proposition 6.2 and Remark 6.2 in Figure 3. We apply the same
assumption for λ, t and the other parameters as in Figure 2. In the left graph, note that t 2 ,
the existing interval of the game, consistently decreases with the platform fee λ. That is,
as λ increases, the manufacturer agrees to introduce the marketplace only if the demand
difference is small. The right figure shows that participants’ risk attitudes influence the
channel introduction strategy when the manufacturer moves first, similar to the trend in
Figure 2.
 INTERNATIONAL JOURNAL OF GENERAL SYSTEMS 489

6.3. Introduction strategy in the e-tailer-as-leader case

In this subsection, we focus on the manufacturer and e-tailer’s channel structure prefer-
ences when the e-tailer moves first, as shown in Proposition 6.3.

Proposition 6.3: The optimal introduction strategies when the e-tailer moves first are as
follows:

(i) For the manufacturer,

• When the platform fee rate λ < λ3 , the manufacturer prefers to introduce the online
marketplace channel, i.e. uN < uFL , for any demand difference t.
• When the platform fee rate λ3 < λ < λ4 , the manufacturer prefers to introduce the
online marketplace channel, i.e. uN < uFL , for max{t 3 , 1} < t < tm3 or tm4 < t < t 3 ,
she prefers not to introduce, i.e. vN > vFL for tm3 < t < tm4 .
• When the platform fee rate λ4 < λ < 1, the manufacturer prefers to introduce
the online marketplace channel, i.e. uN < uFL , for tm4 < t < t 3 , she prefers not to
introduce, i.e. uN > uFL for max{t 3 , 1} < t < tm4 .
(ii) For the e-tailer,
• When the platform fee rate λ < λ5 , the e-tailer prefers to introduce the online mar-
ketplace channel, i.e. vN < vFL , for max{t 3 , 1} < t < te3 or te4 < t < t 3 , she prefers
not to introduce, i.e. vN > vFL for te3 < t < te4 .
• When the platform fee rate λ5 < λ < 1, the e-tailer prefers to introduce the online
marketplace channel, i.e. vN < vLF for any demand difference t.

The results in Proposition 6.3 illustrate the impact of the platform fee λ and the demand
difference t on the manufacturer and e-tailer’s decision with regard to whether to intro-
duce the online marketplace. From (i) of Proposition 6.3, we find that when the e-tailer
has a first-mover advantage, the manufacturer’s preferences regarding the strategy for
introducing the online marketplace are more complicated than in the first two models.
Specifically, if the platform fee is sufficiently small (λ < λ3 ), the manufacturer will always
be pleased to bring products to the online marketplace. When the platform fee is moder-
ate (λ3 < λ < λ4 ), the manufacturer would like to apply the dual-channel system to sell
products when the demand difference is relatively high or low. When the demand differ-
ence is small, the explanation is the same as that in Proposition 6.1. However, we further
find that, given an efficient e-tailer, the manufacturer is still ready to bring products to
the marketplace. This is because as the demand difference grows larger, the e-tailer will
order a larger number of products due to his advantage of highly efficient resale. Specifi-
cally, when t > 8(a − c)/a(λ + 5), the number of products ordered will exceed that in the
case in which the manufacturer does not introduce the online marketplace. As a result,
the additional gain that the manufacturer receives through the traditional reseller channel
is greater than the loss caused by the introduction of the weak online marketplace. This
situation also holds when the platform fee is relatively high. Therefore, when the e-tailer
moves first, regardless of the platform fee, the manufacturer will prefer to introduce the
online marketplace when the value of t is large. From (ii) of Proposition 6.3, we know that
the e-tailer’s preference for the manufacturer’s intrusion strategy is the same as that when
they move simultaneously.
490 H. CHEN ET AL.

Figure 4. Introduction strategy of the online marketplace in Case FL.

Remark 6.3: When the e-tailer moves first, both the manufacturer and the retailer prefer
the manufacturer can acquire Pareto improvement by introducing the online marketplace
if (i) λ < 
λ3 and max{t 3 , 1} < t < min{te3 , tm3 }, and (ii) min{te4 , tm4 } < t < t 3 .

The conclusions of Proposition 6.3 and Remark 6.3 are depicted in Figure 4. The values
of each parameter are the same as those in Figure 2. The intuition behind the results in the
left graph depends on the trade-off between the players’ first-mover advantage and channel
efficiency. The results here provide actionable managerial insights regarding online mar-
ketplaces. Note that t 3 consistently decreases in the platform fee λ; that is, as λ increases,
the demand difference allowed by the manufacturer to introduce the online marketplace
is smaller. However, when the e-tailer moves first, the two parties reach consensus in two
areas: in the first area, the platform fee rate is moderate and the demand difference is small;
in the second area, the demand varies substantially for any given platform fee. However,
as the platform fee and difference in demand increase, the Pareto improvement region will
shrink. In other words, the likelihood of the two reaching consensus will be smaller. In
addition, the right plot indicates the effects of the confidence level on the equilibrium pref-
erences for the two supply chain members. Similar to the above two cases, all of the ranges
will decrease with the confidence level.

7. Conclusions
As online e-marketplace channels become more popular, increasing numbers of manufac-
turers are beginning to set up their own direct channels through online marketplaces to
compete with traditional e-tailer channels. To figure out the manufacturer and e-tailer’s
optimal strategies regarding whether to introduce such a channel, we consider an online
dual-channel supply chain, where the manufacturer chooses to supplement the traditional
e-commerce channels with the online marketplace. That is, in addition to selling prod-
ucts through online retail stores, the manufacturer also considers introducing an online
marketplace channel to increase her profits. Furthermore, when a marketplace channel
 INTERNATIONAL JOURNAL OF GENERAL SYSTEMS 491

is introduced, we consider three cases to explore the effects of different channel power
structures: the simultaneous-decision model, the manufacturer-as-leader model and the
e-tailer-as-leader model. According to the analytical solution of the model, this paper
provides operational management insights regarding online marketplaces.
The manufacturer always prefers to introduce the online marketplace in the model
where she acts as the leader. The e-tailer has the same preference for the online marketplace
in models FL and SS. Under the three power structure models, if the platform fee and the
demand difference between the two channels are very small, the two parties would like to
introduce the online marketplace. As the participants become more risk-averse, the two
parties would be less willing to introduce the online marketplace under the three power
structure models; the realization of the equilibrium strategy under all power structures
will be more difficult. Combined with the cross-effect of the risk attitude and the channel
power, we find that when the demand difference is small, risks will have an obvious impact
on the equilibrium strategies under the three power structure models. In addition, it would
be much easier for the two parties to reach a consensus on whether to introduce the online
marketplace when the participants prefer risks and the e-tailer has strong channel power.
Despite the encouraging results we obtained in this article, many further issues entail
exploration. For example, other forms of demand functions and different channel struc-
tures could be considered; such extensions represent directions for future study. Moreover,
in this paper, we assume that there is uncertainty only with respect to market demand
and production costs. However, other types of uncertainty also exist in the real world. In
addition, this paper assumes that participants have the same risk attitude when making
decisions. However, this is not the case in reality, and extending the approach to consider
participants with different attitudes towards risk is another future research direction.

Disclosure statement
No potential conflict of interest was reported by the author(s).

Funding
This work is supported by the National Natural Science Foundation of China (Nos. 71771165 and
61873108), Humanity and Social Science Youth Foundation of Ministry of Education of China (No.
19YJC630011), General Project of Social Science Foundation of Hubei Province (Later Subsidized
Projects), Hubei Province Education Department Science and Technology Research of Guiding
Project (No. B20122702), and the High Level Training Project of Huanggang Normal University.

Notes on contributors
Huiru Chen received the M.S. degree in mathematics and statistics from Hubei
University, Hubei, China, in 2008. She has authored or coauthored several
papers in IEEE Transactions on Fuzzy Systems, European Journal of Opera-
tional Research, Journal of Cleaner Production, and Soft Computing. She is
currently an Associate Professor with the College of Mathematics and Statistics,
Huanggang Normal University, Hubei, China. Her research interests include
supply chain risk management, outsourcing of business and online retail plat-
form.
492 H. CHEN ET AL.

Yifei Hao received the Ph.D. and B.S. degrees at the School of Mathematics and
Statistics, Lanzhou University in 2010 and 2005, respectively. He has authored
or coauthored several research articles in Communications in Algebra, Semi-
group Forum, Ars Combinatoria, International Journal of Simulation Model-
ing, Journal of Mathematics and Computing. His currently research interests
include collaborative innovation of a supply chain, dynamic knowledge sharing,
dynamic knowledge network, et al.
Yingchen Yan received the B.S. degree in finance from Tianjin University, Tian-
jin, China, in 2014 and is currently working toward the Ph.D. degree at the
College of Management and Economic, Tianjin University, Tianjin, China. She
has authored or coauthored several papers in European Journal of Operational
Research, Journal of Cleaner Production, and Soft Computing. Her current
research interests include online platform retailing, distribution channel, and
interfaces between marketing and operations.

ORCID
Huiru Chen http://orcid.org/0000-0002-2022-7988
Yingchen Yan http://orcid.org/0000-0002-4798-994X

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494 H. CHEN ET AL.

Appendix. The introduction strategy of the emerging online marketplace

considering risk attitude and channel power
Proof of Theorem 4.1: Because the manufacturer’s profit function u(qm , qe , w; x, y) is strictly
increasing with respect to the market size x and decreasing with the selling cost y, the chance con-
straint M{u(qm , qe , w; α)  u0 }  α is equivalent to u0 − u(qm , qe , w; −1 (1 − α),  −1 (α))  0.
Since um (qm , qe , w; α) = max{u0 }, the manufacturer’s maximum profit um (·, ·, ·) under his accept-
able confidence level α satisfies
 
um (qm , qe , w; α) = max u0 | M{u(qm , qe , w; η, ξ )  u0 }  α
 
= u qm , qe , w; −1 (1 − α),  −1 (α)) . (A1)
Similarly, the e-tailer’s maximum profit vm (·, ·, ·) under the acceptable confidence level α is
  
vm (qm , qe , w; α) = max v0  M{v(qm , qe , w; η, ξ )  v0 }  α
 
= v qm , qe , w; −1 (1 − α),  −1 (α) . (A2)
In Case N, the manufacturer sells products only through the traditional e-tailer, i.e. qm = 0. By via
Equations (A1) and (A2), the model (3) can be equivalent to the model (4). 

Proof of Proposition 4.1: We solve the game through backward induction. For model (4), by maxi-
mizing the e-tailer’s profit v(qe , w; −1 (1 − α)) under the acceptable confidence level α, the optimal
−1
e (w; α) = ( (1 − α)t − w)/2b. Substituting qe (w; α) into the manufacturer’s profit
quantity is qN N
function u(qN e (w; α), w)), the first-order condition yields the optimal wholesale price as follows:
wN (α) = −1 (1 − α)t/2. Therefore, the optimal quantity and the wholesale price yield the profits
of the manufacturer and the e-tailer under case N. 

Proof of Theorems 5.1–5.3: Similar to Theorem 4.1, here omitted 

Proof of Propositions 5.1–5.3: Here, we also apply the backward induction to solve this problem.
Similar to the proof of Propositions 4.1, the optimal production quantities, prices and profits can be
obtained. 

Proof of Proposition 5.4: The proof is obvious, here omitted. 

Proof of Proposition 5.5: We compare the quantity of the e-tailer

 
(λ + 1)2 (t − 1)−1 (1 − α) +  −1 (α)
qSS
e − q LF
e = < 0,
2b(5 − λ)(2λ − 1)
 
SS FL 4 (t − 1)−1 (1 − α) +  −1 (α)
qe − qe = < 0.
b(5 − λ)(λ − 3)
−1 −1
Next, we need to compare qLF e and qe , as is shown in qe − qe = ((t −√1) (1 − α) +  √(α))
FL LF FL

(λ + 4λ − 1)/2b(2λ − 1)(λ − 3), and we have qe < qe if 0 < λ < 5 − 2, √

2 LF FL qe > qe if 5 −
LF FL

2 < λ < 12 . Thus, we have qSSe < qe < qe when the

LF FL platform fee rate 0 < λ < 5 − 2, and qSS
e <
√
LF when the platform fee rate λ registers as 5 − 2 < λ < 1 .
qFL
e < q e 2
Next, with respect to the manufacturer’s product quantities, we have
 
SS FL 2 (t − 1)−1 (1 − α) +  −1 (α)
qm − q m = > 0,
b(λ − 5)(λ − 3)
 
(3λ + 1) (t − 1)−1 (1 − α) +  −1 (α)
qFL
m − q LF
m = > 0.
2b(2λ − 1)(λ − 3)

m < qm < qm all the time.

Thus, we have qLF FL SS 
 INTERNATIONAL JOURNAL OF GENERAL SYSTEMS 495

Proof of Proposition 5.6: We compare the profit of the e-tailer. First, we compare vLF and vFL .
 2
LF FL (λ4 + 7λ3 − 20λ2 + 3λ + 1) (t − 1)−1 (1 − α) +  −1 (α)
v −v = .
4b(2λ − 1)2 (λ − 3)2

Upper size dependent factor f (λ) = λ4 + 7λ3 − 20λ2 + 3λ + 1. Because f (0.339) < 0, while
f (0.34) > 0, by the null Theorem, there exists λ1 which satisfies f (λ1 ) = 0, and λ is the unique root
of λ ∈ (0, 1). Thus we have vLF > vFL when λ < λ1 , and vLF < vFL when λ > λ1 .
Second, we have vSS − vLF = −(λ + 1)(λ3 + 2λ2 − 26λ + 9)((t − 1)−1 (1 − α) +  −1 (α))2 /
4b(λ − 5)2 (2λ − 1)2 ). Upper size dependent factor λ3 + 2λ2 − 26λ + 9. Also known by the null
Theorem there is a unique root λ2 in (0.3577, 0.3579), and vSS < vLF when λ < λ2 , and vSS > vFL
when λ > λ2 . With respect to vSS and vFL , we have vSS − vFL = −2(λ2 − 6λ + 7)((t − 1)−1
(1 − α) +  −1 (α))2 /b(λ − 5)2 (λ − 3)2 < 0. Thus, we have vSS < vFL all the time. In summary, for
the e-tailer, we obtain the conclusion.
We compare the manufacturer’s profit, then uLF − uSS = (λ + 1)2 ((t − 1)−1 (1 − α) +  −1
(α))2 /4b(2λ − 1)(λ − 5) > 0, and uSS − uFL = 2((t − 1)−1 (1 − α) +  −1 (α))2 /b(λ − 3)
(λ − 5)) > 0. Thus we have uFL < uSS < uLF all the time. 

Proof of Proposition 6.1: Comparing uSS and uN yields uSS − uN = Q1 /8b(λ − 5), where Q1 =
−(λ + 3)(−1 (1 − α))2 t 2 + 16(−1 (1 − α))−1 (1 − α)t − 2(λ − 3)2 (−1 (1 − α))2 , and it has
two roots
  
8 − 2(5 − λ)(λ + 1)2 −1 (1 − α) −  −1 (α)
tm1 = ,
(λ + 3)−1 (1 − α)
  
8 + 2(5 − λ)(λ + 1)2 −1 (1 − α) −  −1 (α)
tm2 = .
(λ + 3)−1 (1 − α)

In addition, t 2 < tm2 , and t 1 < tm1 if λ < λ1 and t 1 > tm1 if λ > λ1 , where λ1 ∈ (0.76, 0.78) is the
root of the polynomial λ4 − 4λ3 − 18λ2 + 108λ − 71 in (0, 1). In summary, when λ > λ1 , we have
uSS < uN and when λ < λ1 , we have (i) if t 1 < t < tm1 , then uSS > uN , (ii) if tm1 < t < t 1 , then
uSS < uN .
Next comparing vSS and vN , we have vSS − vN = Q2 /16b(λ − 5)2 , here
 2  
Q2 = −(λ2 + 6λ − 39) −1 (1 − α) t 2 + 32−1 (1 − α)(λ − 4) −1 (1 − α) −  −1 (α) t
 2
+ 4(λ3 − 10λ2 + 21λ + 16) −1 (1 − α) −  −1 (α) .

Because the quadratic trinomial Q2 with respect to t, the first coefficient −(λ2 + 6λ − 39)(−1 (1 −
α))2 > 0, = 16(−1 (1 − α))2 (λ3 + 6λ2 − 43λ + 16)(λ − 5)2 (−1 (1 − α) −  −1 (α))2 . From
the zero point theorem, in (0, 1), the cubic equation λ3 + 6λ2 − 43λ + 16 has a unique root
λ2 ∈ (0.395, 0.397), so that > 0 when λ < λ2 , and < 0 when λ > λ2 . So, when λ > λ2 , then
vN < vSS .
When λ < λ2 , the sign of vSS − vN depends on that of two roots
  
2(8λ − 32 + (λ3 + 6λ2 − 43λ + 16)(λ − 5)2 −1 (1 − α) −  −1 (α)
te1 = ,
(λ2 + 6λ − 39)−1 (α)
  
2(8λ − 32 − (λ3 + 6λ2 − 43λ + 16)(λ − 5)2 −1 (1 − α) −  −1 (α)
te2 = .
(λ2 + 6λ − 39)−1 (α)

Further, we can show that t 1 < te1 < te2 < t 1 . Thus, we have (i) if t 1 < t < te1 , then vSS > vN , (ii)
if te1 < t < te2 , then vSS < vN , (iii) if te2 < t < t 1 , then vSS > vN . 
496 H. CHEN ET AL.

Proof of Proposition 6.2: With respect to the manufacturer’s profit, we have

 2
LF N (2λ + t − 2)−1 (1 − α) − 2(λ − 1) −1 (α)
u −u =− > 0.
8b(2λ − 1)
Thus we have uLF > uN all the time.
From comparison of the e-tailer’s profit under Case LF and Case N games, we have
 
 2 (2λ + t − 2)−1 (1 − α) − 2(λ − 2) −1 (α) 
(8λ − 8λt + 2λ + 3t − 2)−1 (1 − α) − (8λ2 + 2λ − 2) −1 (α)
vLF − vN = .
16b(2λ − 1)2
The size of vLF and vN depends on the root te = 2(4λ2 + λ − 1)(−1 (1 − α) −  −1 (α)/−1
(1 − α)(8λ − 3). Through comparison of t 2 , t 2 and te , we have (i) if λ < 13 , then t 2 < te < t 2 , (ii) if
1 3 3 1 1 LF
3 < λ < 8 , then t 2 < t 2 < te , (iii) if 8 < λ, then te < t 2 < t 2 . So we have, when 3 < λ < 2 , v >
1
v . When λ < 3 , we have (i) if t 2 < t < te , then v > v , (ii) if te < t < t 2 , then v < v .
N LF N LF N 

Proof of Proposition 6.3: We compare the profit of the manufacturer under Case FL and Case N.
We have uFL − uN = Q3 /8b(3 − s), here
 2  
Q3 = (λ + 5) −1 (1 − α) t 2 − 16 −1 (1 − α) −  −1 (α) −1 (1 − α)t + 2(λ2 − 4λ + 7)
 2
× −1 (1 − α) −  −1 (α) .
When λ < λ3 , quadratic trinomial Q3 > 0, here λ3 is the root of the polynomial λ2 + 4λ − 1 in
(0, 1); hence, uFL > uN all the time.
When λ3 < λ, the relationships between the size of Q3 and zero depend on two roots
  
(8 − 2(3 − λ))(λ2 + 4λ − 1) −1 (1 − α) −  −1 (α)
tm1 = ,
(λ + 5)−1 (1 − α)
  
(8 + 2(3 − λ))(λ2 + 4λ − 1) −1 (1 − α) −  −1 (α)
tm2 = .
(λ + 5)−1 (1 − α)
Through comparison of t 3 , t 3 , tm1 and tm2 , then when λ3 < λ < λ4 , we have (i) if t 3 < t < tm1 , then
uFL > uN , (ii) if tm1 < t < tm2 , then uFL < uN , (iii) if tm2 < t < t 3 , then uFL > uN .
When λ4 < λ < 1, we have (i) if t 3 < t < tm2 , then vFL < vN , (ii) if tm2 < t < t 3 , then vFL > vN ,
here λ4 is the solution of the polynomial λ4 − 22λ2 + 56λ − 31 at (0, 1). Next, we compare the profit
of the e-tailer under Case FL and Case N. We have vFL − vN = Q4 /16b(3 − s), here
 2
Q4 = −(λ2 + 10λ − 23) −1 (1 − α) −  −1 (α) t 2
 
+ 32−1 (1 − α)(λ − 2) −1 (1 − α) −  −1 (α) t
 2
+ 4(λ3 − 6λ2 + 5λ + 8) −1 (1 − α) −  −1 (α) .
When λ > λ5 , quadratic trinomial Q4 > 0, here λ5 is the root of the polynomial λ3 + 10λ2 − 27λ +
8 in (0, 1). Hence vFL > vN all the time.
When λ < λ5 , the relationships between the size of Q4 and zero depend on two roots
   
2 8s − 16 + (λ3 + 10λ2 − 27λ + 8)(λ − 3)2 −1 (1 − α) −  −1 (α)
tm1 = ,
(λ2 + 10λ − 23)−1 (1 − α)
   
2 8s − 16 − (λ3 + 10λ2 − 27λ + 8)(λ − 3)2 −1 (1 − α) −  −1 (α)
tm2 = .
(λ2 + 10λ − 23)−1 (1 − α)
Through comparison of t 3 , t 3 , te1 and te2 , we have t 3 < te1 < te2 < t 3 . Thus we have (i) if t 3 < t <
te1 , then vFL > vN , (ii) if te1 < t < te2 , then vFL < vN , (iii) if te2 < t < t 3 , then vFL > vN .