The advent of online market platforms like Amazon and eBay has revolutionised the dynamics between suppliers and retailers. Supplier encroachment, where suppliers establish their direct-to-consumer channels alongside traditional retail channels, has recently seen a significant surge. Most suppliers rely on platform agencies to facilitate direct sales, yet much research overlooks these channels' crucial role.

Major online platforms operate two channels: an agency channel in which suppliers retain control over prices and quantities and pay a portion of sales revenue to the platform, and a reselling channel in which the platform purchases goods from the supplier and resells them to consumers. The term ‘agency’ in this context signifies a business model in which the intermediary facilitates transactions but never takes ownership of the products. Most prominent online platforms, such as Walmart, JD, and Amazon, operate as agencies and resellers. 

Although it’s widely accepted that a supplier needs to achieve high sales volume to join a platform’s reselling channel, a study by Stephen M. Gilbert, Professor, Information, Risk & Operations Management, McCombs School of Business; Parshuram Hotkar, Assistant Professor, Operations Management, Indian School of Business; and Chuanjun Liu, Fudan University, demonstrates that the strategic choice of the selling format could be beyond the volume-based reasoning.

In their research paper ‘Channel Choice via On-Line Platform’, they examine a scenario where a supplier distributes products through traditional resellers and can utilise an online platform offering both reselling and agency channels. They study the role of the intensity of competition among traditional resellers and the substitutability between online and traditional resale on the dynamics between the platform and the supplier. 

The paper highlights the intricate dynamics and power balance between online platforms and suppliers engaged in traditional reselling. Suppliers often rely on online agencies to penetrate traditional reseller markets. They can opt for the platform’s agency channel at a predetermined commission rate, but they need to be invited for a reselling contract by the platform, like in the case of Amazon. 

The study demonstrates that selling through an online platform’s agency channel and a traditional reselling channel simultaneously makes the supply chain suboptimal as it leads to overselling. Their findings suggest that reselling contracts can exist even at relatively low commission rates (15-20 percent) to circumvent this suboptimality, challenging the common notion that high agency commission rates are necessary. 

Furthermore, this study sheds light on the different selling formats of powerful platforms like Amazon. Products like Gillette razor blades or Huggies diapers, commonly found in traditional stores and with high online-traditional channel substitutability, are sold through Amazon’s reselling channel.

Conversely, products like handicrafts, which are less available in traditional stores, are also sold through Amazon’s agency channel. Under intense traditional reseller competition and high channel substitutability conditions, the platform and supplier are better off engaging in the reselling contract than the agency channel.

Overall, the study sheds light on the complex interactions between suppliers and online platforms. While online platforms revolutionise supplier-retailer dynamics, with supplier encroachment through direct-to-consumer channels, agency and reselling channels offer nuanced strategies impacting supply chain efficiency.