Dynamic selling strategy for a firm under asymmetric information: Direct selling vs. agent selling

In this paper, we study the dynamic selling strategy for a firm under asymmetric market and product information over two periods. In each period, the firm can sell the product directly to customers, i.e., direct selling, or through an intermediary retailer such as Amazon and eBay, i.e., agent selling. Before the selling season, the firm is uncertain about the market size and the customers are unaware of whether the product matches their tastes. However, by directly interacting with the customers, the firm under direct selling or the retailer under agent selling will obtain additional market information at the end of the first period. Meanwhile, customers in the second period can resolve their product fit uncertainty by accessing the review comments posted by previous customers, if agent selling is adopted in the first period. We show that if the firm and retailer do not share the additional market information with each other, agent selling is never optimal in the second period. However, both direct selling and agent selling may be optimal in the first period, due to the relative effects of the firm's market uncertainty and customers' product fit uncertainty. Interestingly, converse to traditional wisdom, we show that with information sharing, the retailer will always share the additional market information with the firm. Furthermore, in equilibrium, both agent selling and direct selling may be optimal in both periods, depending on the benefit from the additional market information.