A digital platform connects third-party merchants and consumers within a marketplace. It also sells its own products to consumers and takes part in marketplace transactions. Does this dual role lead to unfairness, harming the interests of merchants and consumers? To address this question, Associate Professors WANG Ruitong and QIU Ye of the Advanced Institute of Business at Tongji University conducted in-depth research and, as the first and corresponding authors respectively, published a joint paper entitled “Dual Role and Product Featuring Strategy of Digital Platforms” in Marketing Science, a top marketing journal.

The platform’s vast selection of products can make it difficult for consumers to choose. Therefore, the platform’s product recommendations are crucial for connecting sellers with consumers. However, an increasing number of platforms (e.g. Jingdong and Alibaba) are launching their own product businesses while continuing to serve third-party sellers, thereby competing directly with them. This dual role raises concerns that their product recommendation mechanisms may be ‘self-preferential’, i.e. they may prioritize recommending their own businesses to consumers while restricting and suppressing quality third-party sellers. Furthermore, such unfair product recommendation mechanisms may hinder competition in the market, resulting in a loss of consumer welfare. Various countries’ legislatures have discussed ways to address this issue, such as banning online platforms’ self-owned businesses and imposing mandatory unbundling of platforms’ businesses. For instance, India compelled Amazon to separate its marketplace and retail operations in 2019.

This study uses game theory to create theoretical models of the platform’s product recommendations and pricing decisions. It then analyzes the optimal product recommendation mechanism and the corresponding merchant prices. By comparing the two equilibria when platform self-operated business is either allowed or prohibited, the study explores how this business model impacts the platform’s product recommendation mechanism, price competition among merchants, and consumer welfare. It reveals that the platform’s recommendation mechanism is biased in that it can control competition among its internal merchants by recommending suboptimal or even inferior goods. However, the findings also suggest that splitting the platform’s own business could exacerbate the bias of its recommendation mechanism, reducing competition among internal merchants and resulting in a loss of consumer welfare. Therefore, splitting the platform’s self-operated business does not address the negative impact on competition caused by the dual roles; it may instead exacerbate the bias of the platform’s recommendation mechanism and reduce competition within the platform, thereby harming consumer welfare. This study provides theoretical insights for comprehensive, rational antitrust policies in the platform economy that focus on consumer protection.

This research focuses on the emerging scenario in the digital economy in which platforms act as both market operators and direct sellers. It takes the dual role of digital platforms as its entry point. It investigates how product recommendation strategies employed in this dual capacity affect market competition and consumer welfare. Using a game-theoretic model, the study reveals the strategic trade-offs that platforms make to maximize profit through product recommendations and examines the welfare effects that government restrictions on platform roles may have on both sides. Combining policy practices in future research could explore other mechanisms influencing competitive-cooperative dynamics among firms further, offering important policy value in addressing the ‘involution’ dilemma faced by modern economies.