When Platform Private Labels Help Incumbent Sellers: The Role of Contract Unobservability

Online platforms often begin as intermediaries for third-party sellers but may later introduce private-label products. We develop a model in which a manufacturer sells through a platform that can introduce its own private label. Both firms procure from upstream suppliers through contracts that may be observable or unobservable. Under observable contracts, platform entry always reduces the manufacturer’s profit. Under unobservable contracts, however, entry can benefit both firms. A private wholesale-price deviation does not induce a direct pricing response from the rival chain, strengthening suppliers’ incentives to reduce wholesale prices. When the private label is sufficiently differentiated, procurement savings and demand adjustments can outweigh the competitive pressure from entry. We further endogenize transparency and show that the manufacturer prefers nondisclosure, whereas the platform may disclose its procurement cost when competition is sufficiently intense. Extensions and sensitivity analyses examine alternative sourcing structures, product preferences, beliefs, and market conditions, clarifying the robustness and boundaries of the manufacturer’s gain from platform entry.