Channel structure of online retail platforms: impact of asymmetric information and capacity constraints

When selling online, manufacturers can either sell directly to customers via the platform (agency channel), sell the platform their products (reselling channel), or engage in both channels simultaneously. Manufacturers typically operate with limited capacity, and this information is often not disclosed to platforms. Our study develops a screening game framework in which the online platform presents a menu of quantity-price pairs contracts to the manufacturer whose capacity information is private. The manufacturer then determines the quantity it will allocate to both channels, reselling and agency. We find the manufacturer prefers both agency and reselling channels under the asymmetric information game. We also show that a manufacturer with high capacity benefits from keeping its capacity information private, but a manufacturer with low capacity does not. Furthermore, the manufacturer and the platform may not benefit from more production capacity of the manufacturer and if capacity of the manufacturer is sufficiently low, then it may be advantageous for the platform not knowing the manufacturer’s capacity. Lastly, asymmetric information on capacity could lead to higher consumer surplus. Our study offers insights for manufacturers and online platforms, assisting them in making strategic decisions and navigating the dynamics of information sharing within the online retail landscape.