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Why wholesale selling persists, despite agency selling growth

GAINESVILLE, Fla. – In 2021, e-commerce sales topped $870 billion in the United States, an increase of over 50% in just two years. As Americans have steadily continued clicking ‘add to cart’ for their items, retailers have sought the most strategic ways to sell products online.

The two main selling formats that online retailers, often called e-tailers, use include wholesale selling and agency selling. Wholesale selling is the traditional practice that involves an e-tailer purchasing products from suppliers and then reselling them to consumers. Think, before you bought that Samsung TV from Best Buy, it was originally purchased by the electronics chain before being resold to you.   

Agency selling, on the other hand, is an emerging practice in which e-tailers allow suppliers to sell products to consumers directly on their platforms in return for commissions. For example, if you’ve purchased an item on Amazon, it’s likely that the item is sold by an individual seller who has made their products available through Amazon Marketplace.

The popularity of agency selling has grown for a number of reasons, including lower prices for consumers and benefits to e-tailers like more efficient distribution channels. So why, then, does wholesale selling continue to dominate across different markets?

Amy Pan, Honggang Hu and Quan Zheng.

Associate Professor Amy Pan and alumni Honggang Hu and Quan Zheng.

“We find that while wholesale selling isn’t as vertically efficient for e-tailers as agency selling, wholesale selling enables the e-tailer to manipulate supplier competition, which constitutes a force toward improving the e-tailer’s profit,” explained Amy Pan, Associate Professor at the University of Florida Warrington College of Business.

In addition to an improved profit for e-tailers through wholesale selling, Pan and co-authors Honggang Hu (Ph.D. ’22) and Quan Zheng (Ph.D. ’18) find that agency selling doesn’t always benefit consumers or suppliers.

“As you might expect, both society and consumers benefit from the selling format that results in a lower market price, and a clear-cut price comparison is available,” the researchers note. “Contrary to conventional wisdom, we show that agency selling does not always lead to a higher consumer surplus. On the supplier side, the cost reduction under agency selling doesn’t necessarily benefit suppliers, and we caution against assuming away suppliers’ marginal costs may qualitatively obscure the insights.

“E-tailers have the incentive to help suppliers reduce costs. For example, subsidizes sellers who fulfill orders through Cainiao (Alibaba’s smart logistics network). However, these ‘benevolent’ services on cost reduction or other process innovations may backfire for the suppliers because a lower marginal cost will prompt the e-tailer to raise her commission fee.”

Based on their findings, the authors recommend that managers who are looking for the most efficient selling system for their company consider the benefits and downsides to both wholesale and agency selling. For e-tailers who use smart pricing technologies, made available through the advent of big data and artificial intelligence, these systems take all wholesale prices as inputs, which facilitates cross-brand pass-through, a trade promotion on one brand that leads to a shelf price reduction on another brand in the same category.

“Such retailers will find our results useful in deciding whether to persist with the wholesale price model or switch to the agency format,” the authors note in their paper, “Agency or Wholesale? The Role of Retail Pass-Through.”

The complete research is featured in Management Science.