By Simon Anderson and Özlem Bedre-Defolie
Many digital platforms, like Amazon, both host third-party products and sell their own products: they have a “hybrid” business model. While platforms provide innovative, efficient, and important products or services to the market, new research from BCCP Senior Fellow Özlem Bedre-Defolie and co-author Simon Anderson outlines conditions under which the hybrid model may harm consumers and sellers using platforms to access big marketplaces.
Extant economic theory is unclear under what conditions platforms want to engage in the hybrid mode because it cannibalizes the commissions that platforms earn from sales of third-party products. Major platforms charge significant commissions (often 15% on Amazon, depending on the product category). The authors formalize this trade-off between commission revenue and profit from own-product sales, identifying markets where hybrid model benefits consumers.
The clearest situation where the hybrid model benefits consumers is when consumers do not differentiate between products and many sellers compete for business on the platform. An example is when many sellers offer the same brand of Bluetooth speaker. The platform would enter this market and sell the Bluetooth speaker if its (purchasing) cost of the speaker is below the cost of third-party sellers. The platform’s Bluetooth speaker would then replace third-party sellers’ offers entirely by selling it at a lower price. Here, the hybrid model benefits consumers.
The hybrid model can also benefit consumers when big market-dominating sellers exist (e.g., Walmart). If the big seller competes against the platform (and the many other third-party sellers), then the platform would once again engage in hybrid model if it could purchase the Bluetooth speaker cheaper than its third-party sellers. The platform’s product would replace the third-party sellers and compete with the big seller, driving down consumer prices. The same logic applies if the big firm is the only seller on the platform; again, consumers benefit.
Hybrid business model might harm consumers in other markets. If the big seller chooses to sell on both the platform and through its own retail channel, then both the big seller and the platform mark up prices. The platform may choose to release its own product to capture more profit from the seller, but prices do not decrease as much because the big seller wants to protect demand on its direct channel.
Hybrid business practices can harm consumers in markets where consumers have different tastes for products. For example, instead of the same brand’s Bluetooth, sellers offer different brands’ speakers with different characteristics. Here the platform product steals some of the demand from third-party products. The platform now acts as both the referee as well as a player. The authors (in an earlier work “Hybrid Platform Model” 2022) find that, when the platform is hybrid in these markets, it extracts higher commission fees from third-party sellers, so consumers are provided with fewer choices and pay higher prices.
Legislation has begun to target these hybrid business practices. In July 2022 the European Commission passed the Digital Markets Act and the Digital Services Act, which ban or regulate certain practices of these “gatekeeper” platforms. For instance, self-preferencing (steering consumers towards the platform-owned products) is banned and hybrid platforms must provide their third-party sellers access to data generated on the platform. Similarly, the Ending Platform Monopolies Act in the US proposes to prohibit self-preferencing and might ban the hybrid business model altogether. As legislators and regulators continue to review these platforms, they must consider the various markets where these practices can help or harm consumers, then tailor their responses accordingly.
The full paper "Online Trade Platforms: Hosting, Selling, or Both?" is published in International Journal of Industrial Organization.
This text is jointly published by BCCP News and BSE Insights.