Blessing or Curse: Third-Party Product Variety for First-Party Product Development in Online Platforms

In recent years, to leverage their information advantage and expand revenue, many online platforms have built their own brands and developed products themselves. There is a widespread concern that these first-party products, utilizing third-party information, may gain popularity and encroach upon the market share of third-party manufacturers. Consequently, some manufacturers have started taking countermeasures to protect their information by reducing the variety of their products. This paper presents an analytical model to examine the strategic interactions of first-party product development in an online marketplace involving a platform and a manufacturer. The focus is on the role of the manufacturer's product variety to gain a better understanding of how its trade-offs impact market outcomes. Our analysis reveals three key insights. First, in terms of the platform's entry into first-party product development, the manufacturer's product variety has non-monotonic effects on the platform's and the manufacturer's profits. Second, in highly competitive markets, when the manufacturer's product variety is high, the platform will launch first-party products; whereas when the manufacturer's product variety is low, it is not optimal for the platform to do so. Third, the manufacturer can benefit from strategically reducing the product variety to discourage the platform's first-party product development. Furthermore, in anticipation of the manufacturer's strategic decision to reduce product variety, the platform ought to refrain from initiating first-party product development in highly competitive markets. Otherwise, the platform's entry intention may provoke the manufacturer's strategic countermeasures and cause tangible loss to all parties, including the manufacturer, consumers, and the platform itself. These results provide useful managerial and regulatory implications.