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Advertising versus Brokerage Model for Online Trading Platforms

Author

Listed:
  • Jianqing Chen

    () (Naveen Jindal School of Management, The University of Texas at Dallas)

  • Ming Fan

    () (Foster School of Business, University of Washington)

  • Mingzhi Li

    () (School of Economics and Management, Tsinghua University)

Abstract

The two leading online consumer-to-consumer platforms use very different revenue models: eBay.com in the United States uses a brokerage model in which sellers pay eBay on a transaction basis, whereas Taobao.com in China uses an advertising model in which sellers can use basic platform service for free and pay Taobao for advertising service to increase their exposure. This paper studies how the revenue model affects a platform's revenue, buyers' payoffs, sellers' payoffs, and social welfare. We find that matching probability on a platform plays a critical role in determining which revenue model can generate more revenue for the platform, provided a significant proportion of space being dedicated to advertising under the advertising model: If the matching probability is high, the brokerage model generates more revenue for the platform than the advertising model; otherwise, the advertising model generates more revenue. Buyers are always better off under the advertising model because of larger participation by the sellers for the platform's free service. Sellers are better off under the advertising model in most scenarios. The only exception is that when the matching probability is low and platform dedicates a large space to advertising. Under these conditions, those sellers having the payoffs similar to the marginal advertiser (who is indifferent in advertising or not) can be worse off under the advertising model. Lastly, the advertising model generates more social welfare than the brokerage model.

Suggested Citation

  • Jianqing Chen & Ming Fan & Mingzhi Li, 2012. "Advertising versus Brokerage Model for Online Trading Platforms," Working Papers 12-12, NET Institute.
  • Handle: RePEc:net:wpaper:1212
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    File URL: http://www.NETinst.org/Chen_12-12.pdf
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    References listed on IDEAS

    as
    1. Nicholas Economides & Evangelos Katsamakas, 2006. "Two-Sided Competition of Proprietary vs. Open Source Technology Platforms and the Implications for the Software Industry," Management Science, INFORMS, vol. 52(7), pages 1057-1071, July.
    2. Ramon Casadesus-Masanell & Feng Zhu, 2010. "Strategies to Fight Ad-Sponsored Rivals," Management Science, INFORMS, vol. 56(9), pages 1484-1499, September.
    3. Simon P. Anderson & Stephen Coate, 2005. "Market Provision of Broadcasting: A Welfare Analysis," Review of Economic Studies, Oxford University Press, vol. 72(4), pages 947-972.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Revenue Model; Business Model; Two-Sided Market;

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics

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