Alibaba

Alibaba manages business-to-consumer marketplaces with the avowed mission to "make it easy to do business anywhere." In March 2020, Alibaba's TMall hosted over 250,000 brands and merchants. Merchants pay Alibaba for marketing services as well as commissions of 0.3% to 5.0% of the transaction value, depending on the product category. Especially for consumers who live outside major cities, Alibaba has effectively disintermediated the conventional chain of wholesalers and retailers. Who benefits relatively more - consumer or merchant - depends on the price elasticities of demand and supply. For products with elastic demand, the buyer's price falls relatively little and consumers benefit less. By contrast, for products with inelastic demand, the buyer's price falls relatively more and consumers benefit more.

Alibaba manages business-to-consumer marketplaces with the avowed mission to "make it easy to do business anywhere." In March 2020, Alibaba's TMall hosted over 250,000 brands and merchants. Merchants pay Alibaba for marketing services as well as commissions of up to 5.0% of the transaction value, depending on the product category.

a) Consider the situation prior to Alibaba. Suppose that the cost of retailing is 10% of the retail price, and the retail price of an item is 100 yuan with 50,000 units sold per month. (i) Using suitable demand and supply curves, illustrate the equilibrium; (ii) What are the buyer's price and seller's price?

b) Now suppose that Alibaba reduces the cost of retailing to 5%. How would that affect the equilibrium, buyer's price, and seller's price?

c) Compare low involvement products with other products. Which have the more elastic demand?

d) Which consumers would benefit relatively more from Alibaba? Those buying low involvement products or other products?