Managing product variety on online platform: Consumer heterogeneity and diseconomies of scope.

Recent innovations in e-commerce have led to the emergence of online retailing platforms, where millions of products are sold. Most of these products are sold by third-party sellers who pay a fee for the e-retailer (called the platform owner). We investigate how the e-retailer manages the various products in the presence of consumer heterogeneity and diseconomies of scope. Our analytical results indicate that the e-retailer prefers the platform-selling mode when consumers have stronger heterogeneity or when the value of a product is high; moreover, the consumer heterogeneity benefits the e-retailer and hurts the supplier. We also analyze the effect of the relationship of among categories on the e-retailer's choice. We show that the relationship among categories can invert the existing format. In addition, we find that the e-retailer may be better off and raise the number of products under strong diseconomies of scope when the categories are complements, and the opposite is true when the categories are substitutable.