How a platform's private label interacts with a manufacturer's financing strategy

Abstract

Recently, major e-commerce retailers like Amazon and Alibaba have started providing working capital loans to capital-constrained manufacturers selling through their marketplaces. Additionally, these platforms often introduce private labels (PLs), such as Amazon Basics, that compete with manufacturers' brands. This leads to a coopetative partnership between platforms and these small and medium enterprises, such as LonoLife, which compete with the platforms' PLs and also avail loans from them. Using game-theoretic analyses, we investigate the following question: How does the platform's PL introduction strategy impact a capital-constrained manufacturer's financing decision? The manufacturer manages the operational risk in its manufacturing process while selecting the optimal financing strategy, with or without the platform's PL. Intuitively, if the platform introduces the PL, as a strategic response, the manufacturer should consider opting for bank financing. However, the manufacturer does the opposite by switching to platform financing when the values of the production cost are within the intermediate range and the perceived quality of PL is low. Interestingly, the platform might adopt a cooperative strategy by not introducing the PL if the manufacturer decides to use platform financing. We recommend that the platform can utilise its PL effectively to mitigate operational risk in the upstream production process.