Online platforms are becoming more and more popular these days. From travel, to retail to even financing online platforms are gaining more stake in the market. But how the increased competition would affect sellers on the platform? That is a question answered in a paper recently published in the American Economic Association.
In 2018, Yelp Transactions Platform, an online marketplace, expanded the platform by signing a contract with Grubhub. Back then, Grubhub was the largest food delivery service in the United States. As a result of this deal, all restaurants affiliated with Grubhub were automatically added to Yelp Transactions Platform. This caused a sharp increase in the number of restaurants in the Yelp platform. In a few weeks, the number of restaurants on the platform rose from less than 60 thousand to more than 80 thousand. A major question was what would happen to the competition on the platform.
According to economic theory this competition could either increase or harm the incumbents in the market. On one hand, this supply shock could harm the sellers. On the other hand network effects can have a positive effect for incumbents as the increased supply may attract more customers (the demand) on the platform.
According to the paper results, the expansion was beneficial to high quality sellers and deteriorating for low-quality ones. As it is quite clear in these two graphs. The sales of high-rated firms boosted after the supply shock(the left graph), on the other hand the weekly revenue of low-rated firms diminished after the shock.
The findings confirm that the net effect of the countervailing forces behind market expansions depends crucially on the quality of incumbent businesses.
Source: American Economic Association
