Analyzing competition among sellers in a B2B exchange

Business-to-business exchanges are expected to bring several advantages to the participants of the exchange. One of the principal advantages of such exchanges lies in their promise of lowering prices for buyers due to increased competition among the sellers for the buyers’ business. This paper models the competition between similar sellers vying for the same business by bidding on price. It captures some of the unique features of such a competition that has been made possible by the existence of an online marketplace. We consider the case where the capacities of the sellers are such that they individually cannot cater to the entire demand, but their cumulative capacity is more than the required demand. This type of price competition is distinct from the standard Bertrand price competition model, where sellers compete on prices and end up supplying at their marginal cost. It is also distinct from a capacity constrained competition that has been extensively analyzed in existing literature. We also take into account the nature of the demand for the commodities in such marketplaces, which is distinct from consumer markets. We find that there exists a mixed strategy equilibrium in prices among the sellers, and specify the nature of this equilibrium. The model is then extended to an nseller case, and the results are seen to be consistent with the expectations of lower average prices with increasing n. A generalized model with only m of the n bidding sellers being required to cater to the demand is then considered. The results show that it is crucial for the sellers to be informed about the total quantity that has already been bid for before deciding whether or not to participate in the auction, and the availability of this information is crucial for the “fairness” of the exchange. In the final part of the paper, we analyze the effect of cost variations between sellers (effectively modeling competitors facing same cost distributions rather than same costs), and show that the nature of the equilibrium is different from that with fixed costs. In the process, we come up with an alternate explanation of price randomization that is often seen in such marketplaces.