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16 May 2013Working Paper Summaries

Marketplace or Reseller?

by Andrei Hagiu and Julian Wright
Intermediaries can often choose to operate as a marketplace, as a reseller, or as a hybrid having some products offered under each of the two different modes. For example, Alibaba.com, eBay.com, Premium Outlets, and Simon Malls act as marketplaces, in which suppliers sell directly to buyers via a platform. In contrast, retailers like 7-Eleven, Eastbay.com, Lowes, and Zappos.com resell the products they purchase from suppliers to buyers. A hybrid mode is also possible: For example, the largest electronics retailer in the United States, Best Buy, has taken a step towards the marketplace mode by allowing Apple, Samsung, and Microsoft to launch their own ministores within Best Buy stores. What economic tradeoffs drive an intermediary to adopt one mode over the other, or both? In this paper, the authors provide a new style of modeling intermediaries' strategic positioning decisions and a theory of which products an intermediary should offer in each mode. They also present a guide to how intermediaries should optimally position themselves between the two different modes. Managerial implications not only apply to an intermediary choosing between positioning itself as a pure reseller or a pure marketplace, but to hybrid modes in which the intermediary needs to determine how many products (and in the case of diverse products, which products) to offer in each mode. Key concepts include:
  • A key distinction between marketplaces and resellers is the allocation of control rights between independent suppliers and the intermediary over non-contractible decisions (prices, advertising, customer service, responsibility for order fulfillment, etc.) pertaining to the products being sold.
  • At the most basic level, a marketplace benefits from allowing suppliers to exploit their local information, whereas a reseller can exploit its own local information.
  • Intermediaries should choose the marketplace mode for the following types of products: (1) products for which suppliers have a significant information advantage about the best way to market products relative to the intermediary; (2) products whose prices and marketing activities have limited spillovers on other products; (3) long-tail products; and (4) products provided by late stage ventures.
  • On the other hand, intermediaries should choose the reseller mode for the following types of products: (1) products for which the intermediary has an information advantage about the best way to market products relative to suppliers; (2) products whose prices and marketing activities have significant spillovers on other products; (3) short-tail products; and (4) products provided by early stage ventures.

Author Abstract

Intermediaries can choose between functioning as a marketplace (on which suppliers sell their products directly to buyers) or as a reseller (purchasing products from suppliers and selling them to buyers). We model this as a choice between whether control rights over a non-contractible decision variable (the level of marketing activities) are better held by suppliers (the marketplace-mode) or by the intermediary (the reseller-mode). Whether the marketplace- or the reseller-mode is preferred depends on whether independent suppliers or the intermediary are better suited to optimally tailor marketing activities for each specific product. We show that this tradeoff is shifted towards the reseller-mode when marketing activities create spillovers across products and when network effects lead to unfavorable expectations about supplier participation, whereas it is shifted towards the marketplace for long-tail products. We thus provide a theory of which products an intermediary should offer in each mode.

Paper Information

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