The Effects of Government Licensing on E-commerce: Evidence from Alibaba

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To be healthy, markets need rules with timely information and effective enforcement. Online e‑commerce platforms can set rules based on what the platforms’ operators observe. But information crucial to consumer welfare is not always available to the platforms. This includes information about sellers’ qualifications or supply chain issues affecting product quality. This information may be offline, and sellers may not report it truthfully. Governments can impose occupational licensing or quality standards, but they often have too few resources to monitor compliance in real time.

In this paper, we look at data from Alibaba, China’s largest e-commerce platform, to examine how China’s 2015 Food Safety Law (FSL) affects e-commerce. The FSL requires most food sellers on e-commerce platforms to obtain a valid, offline license for retail food handling. 

We find that larger and more reputable sellers tend to display an FSL license earlier than other sellers, and buyers are more willing to transact with a seller with a license. In terms of sales, sellers that are new to the platform and not well known benefit more from having a license than do more established and well-known sellers. This suggests that the fact of having a license provides useful information in addition to what consumers observe on the platform. Market-wide, we find that since the FSL was enacted, the average quality of the food sellers that remain has improved, and sales are more concentrated among the top sellers. At the same time, the gross merchandise value of food sold on Alibaba has not declined. And one year into the full enforcement of the FSL, the average sales price had not increased significantly. This suggests that the FSL does not hamper the long-term performance of the regulated market, probably because it has enhanced seller quality and made the market more transparent.