Self-Preferencing in E-Commerce Marketplaces: The Role of Sponsored Advertising and Private Labels

Traditionally, e-commerce marketplaces have enabled third-party sellers to sell to potential consumers and have earned commission from the sales. In recent years, e-commerce platforms have begun to leverage private label and sponsored advertising to generate additional revenue. Using a game-theoretic model, we examine when and why a platform may seek to give preference to its private label in sponsored advertising, and its impact on consumers and third-party sellers. Our analysis shows that self-preferencing hurts consumers even though in equilibrium the platform offers the private label at a price lower than the price of third-party sellers. Furthermore, such self-preferencing by the platform can improve the profits of some third-party sellers. We also find that it is not always optimal for the platform to self-preference its private label in sponsored advertising, particularly when advertising significantly increases demand. Moreover, the private label and sponsored advertising function as complements improving the platform’s profits.

Duke Scholars

Author Wilfred Amaldoss Fuqua School of Business