Platform Service Offering to Business Customers: Strategic Considerations in Engendering Seller Use of Marketing Tools

Many e-commerce platforms provide marketing tools to help their sellers attract customers and enhance user experience. However, there is virtually no theoretical framework or systematic evidence that provides insights to platforms on how their business customers use these marketing tools. In this paper, we develop a theoretical framework and apply it to an empirical setting to understand how business customers choose between two service offerings (paid search and hot shop) provided by an e-commerce platform. A unique aspect of our modeling framework is that we incorporate two types of heterogeneous strategic considerations in sellers' choice decisions of marketing tools: competitor and consumer reactions. To capture seller consideration of competition, we adapt the cognitive hierarchy framework by modeling sellers' differing abilities to predict how competition affects their decisions. To capture seller consideration of consumer response, we first specify a sales-response model in which sales are affected by the marketing tools used and then incorporate the response parameters in sellers' payoff functions. Our empirical analysis indicates that these two types of strategic considerations are both important. Our estimation results show that, in making decisions on which marketing tool(s) to use, sellers tend to differentiate themselves from the competition. We also find that sellers with a higher rating tend to be more strategic. This finding provides a useful metric associated with firms' strategic ability, which is often difficult to quantify, and helps researchers to test theoretical predictions related to firms' strategic thinking using field data. We perform two comparative statics exercises to derive managerial insights. The first exercise offers a benchmark analysis to help platforms evaluate which targeted promotion strategies are most effective. The second exercise indicates that an increase in seller strategic ability would reduce the overall seller usage of marketing tools, and we offer specific suggestions to help platform managers increase the use of their marketing tools.