Hybrid Platform Model

Title: Hybrid Platform Model (with Simon Anderson)

Abstract: We provide a canonical and tractable model of a trade platform which enables buyers and sellers to transact and charges percentage fees over third-party product sales. We extend it for "hybrid" platforms (like Amazon), which also resell their own products. The hybrid platform controls both the number of differentiated products (variety) it hosts and their prices via its own product price and seller fee. We micro-found the model by engaging two recent conceptual innovations: a mixed oligopoly demand model where a large player (the platform’s product) interacts with a monopolistically competitive third-party sellers and long-run aggregative games with free entry to model sellers entry. We show that allowing the platform sell its own product (hybrid mode) hurts consumers. The higher advantage (quality minus cost) of the platform's product has, the larger its market share is, the higher the platform's fee is on third-party sales, and the lower consumer surplus is. The hybrid platform might favor its product at the disadvantage of third-party products if the own product advantage is sufficiently high. We also provide some tax policy implications.