Platform financing vs. bank financing: Strategic choice of financing mode under seller competition

Third-party sellers on online platforms primarily rely on banks to meet their financing requirements and are often constrained by the lack of sufficient working capital. Online platforms such as Amazon and Alibaba have ushered new dynamics in the e-commerce financing landscape by offering working capital loans to these sellers, thereby directly competing with banks and influencing market competition. This paper analytically studies how the competition between third-party sellers on platforms affects the strategic financing choices of sellers, namely, platform financing (P) vs. bank financing (B). We examine how the financing choice influences sellers’ pricing decisions in the competitive product market. Based on the sellers’ financing choices, four lending modes are possible: BB, PP, BP, and PB. Our analyses provide critical insights on the optimal financing choices and uncover the interplay of pricing, product substitution, referral fees, and production costs. We show that any seller deviating from PP to a hybrid mode (BP/PB) leads to a higher platform interest rate and a lower seller profit. We find that the competing sellers choose a hybrid lending mode when the unit production cost is low. However, the platform always prefers PP, leading to an all-win outcome in the supply chain when the production cost is high. Furthermore, for products with low referral fees and high substitution effect, BP/PB emerges as equilibrium, while for products with low referral fees and low substitution effect, PP is the equilibrium outcome. Interestingly, we find that both sellers may choose bank financing when their working capital levels are high.