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Competition Among Sellers in Online Exchanges

Warrington School of Business, University of Florida, Gainesville, Florida 32611
Krannert Graduate School of Management, Purdue University, West Lafayette, Indiana 47907
Krannert Graduate School of Management, Purdue University, West Lafayette, Indiana 47907
shubho.bandyopadhyay{at}cba.ufl.edu
barron{at}mgmt.purdue.edu
alok{at}mgmt.purdue.edu

With the advent of the Internet, and the minimal information technology requirements of a trading partner to join an exchange, the number of sellers who can qualify and participate in online exchanges is greatly increased. We model the competition between two sellers with different unit costs and production capacities responding to a buyer demand. The resulting mixed-strategy equilibrium shows that one of the sellers has a normal high price with random sales, while the other seller continuously randomizes its prices. It also brings out the inherent advantages that sellers with lower marginal costs or higher capacities have in joining these exchanges, and provides a theoretical basis for understanding the relative advantages of various types of sellers in such exchanges.

Key Words: online exchanges; reverse auctions; pricing power; mixed-strategy equilibria
History: This paper was received on December 20, 2002.

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