From Lemon Market to Managed Market: How Flagship Entry Reshapes Sellers’ Composition in the Online Market

Abstract

With the rapid development of e-commerce, ensuring product quality on online platforms has become increasingly important, especially in developing countries where market regulations are still underdeveloped. By treating different sellers offering the same brand’s products as an industry, this study examines the impact of flagship store entry on online product quality by constructing a multiple period difference-in-difference model and conducts detailed empirical tests using full-category and large-span data from Taobao. The empirical results demonstrate that flagship store entry not only prompts the exit of incumbent sellers and deters potential new entrants due to the competition effect, but also facilitates the exit of low-quality sellers while attracting high-quality sellers as a result of a consumer-learning effect. Consequently, the overall quality of the industry is improved, and this effect is more pronounced in high-priced and durable goods industries. The findings of this study have important implications for market structure design and online quality governance in online marketplaces.