Platform Credit and E-Commerce Market Structure

E-commerce is one of the most vibrant marketplaces. It estimated that e-commerce spending reached 8% of consumption in the U.S. by 2017, yielding consumers the equivalent of a 1% permanent boost to consumption, or over $1,000 per household.1 As transaction and data hubs, e-commerce platforms are uniquely positioned to offer credit to online merchants by leveraging on their advantages in screening, monitoring, and enforcement. Financial technologies (“FinTech”) have stimulated great interests among researchers and practitioners. E-commerce platforms are among the leading FinTech players. Alibaba in China and its counterpart in the U.S., Amazon, have lent billions of dollars to their users.

The design of e-commerce platform plays a critical role in generating an efficient match between customers’ product demand with merchants’ product supply. While many features of e-commerce platforms have been studied in the academic literature, we are the first to study how platform credit affects the e-commerce market structure, and thus, may contribute to the prosperity of online economy.

To answer this question, we obtain data from the Alibaba Group and its lending affiliate Ant Financial that cover all merchants on Taobao.com and products ranging from clothes to digital devices, including almost every retail category. From 2008 to 2015, the nominal value of online retail sales in China increased by more than 30 times. By 2015, online sales accounted for 12.6% of total retail sales, of which Taobao and Tmall (the business-to-customer platform of Alibaba) together account for more than 82%. An average merchant on Taobao.com has a monthly sales of $6,600, which is close to the average credit line extended by Ant Financial to merchants. The size dispersion is huge with a standard deviation of sales equal to $28,000. Merchants are atomic players. The average market share is below 0.01%, and the standard deviation is 0.3%.

We estimate the causal effects of platform credit on the allocation of customers' attention and purchases among merchants within product categories. Our methodologies explore two semi-experimental settings (regression discontinuity design and difference in difference) created respectively by the algorithmic lending rules of Ant Financial and the annual shopping festival, “Double Eleven”, on Alibaba’s e-commerce platforms.

We find that platform credit amplifies the selection of merchants by customers. Customers vote by their purchases. Merchants' size is a proxy for the popularity of their products. We find that larger merchants gain market share faster than smaller merchants when both receive credit. We also proxy a merchant’s popularity among customers by the customer reviews, and find that merchants with better reviews gain market share faster after receiving credit.

How can credit amplify the selection of merchants by customers? The key friction in online markets is the search friction. Customers have to navigate through thousands of merchants that seemingly sell homogeneous products. And a natural solution is advertisement. We find that larger merchants on average take up more credit from the platform and spend more on advertisement. This explains our findings that the growth rate of customer attention, measured by the number of visits and customer IP addresses that merchants’ Taobao webpage receives, is higher for larger merchants than for smaller merchants when both receive credit from the platform.

Overall, our findings show that platform credit allows merchants favored by customers to receive more attention and take up larger market shares. Our paper mainly contribute to the academic literature of finance and industrial organization.2 The accelerated selection of merchants may help an e-commerce platform grow as customers’ preference is better expressed on the platform.3 From this perspective, e-commerce platforms extend credit not only because they can (e.g., due to the data advantages) but also because they want to foster a more active online market that may in turn bring other sources of income. This incentive is absent from traditional lenders, such as banks. In the last decade, various platforms emerge in the areas of payment, on-demand labor, and international commerce. It is an intriguing question whether they will start to lend to their users, and how their lending behavior differs from traditional lenders in light of our findings.

1. Dolfen, P., L. Einav, P. J. Klenow, B. Klopack, J. D. Levin, L. Levin, and W. Best (2018), “Assessing the gains from e-commerce”, Working Paper, Stanford University.
2. Please refer to Maksimovic, V. (1990), “Product market imperfections and loan commitments”, The Journal of Finance 45(5), 1641–1653; Phillips, G. M. (1995), “Increased debt and industry product markets an empirical analysis”, Journal of Financial Economics 37(2), 189 – 238; Campello, M. (2006), “Debt financing: Does it boost or hurt firm performance in product markets?” Journal of Financial Economics 82(1), 135 – 172; Fresard, L. (2010), “Financial strength and product market behavior: The real effects of corporate cash holdings”, The Journal of Finance 65(3), 1097–1122.
3. Through the cross-side externality, more customer joining the platform can lead to more merchants joining this two-sided market. For the concept of cross-side externality, please refer to Rochet, J.-C. and J. Tirole (2006), “Two-sided markets: a progress report”, The RAND Journal of Economics 37(3), 645–667.