Abstract
Intermediaries can choose between functioning as a marketplace (in which suppliers sell their products directly to buyers) or as a reseller (by purchasing products from suppliers and selling them to buyers). We model this as a decision between whether control rights over a noncontractible decision variable (the choice of some marketing activity) 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 have more important information relevant to the optimal tailoring of marketing activities for each specific product. We show that this trade-off is shifted toward the reseller mode when marketing activities create spillovers across products and when network effects lead to unfavorable expectations about supplier participation. If the reseller has a variable cost advantage (respectively, disadvantage) relative to the marketplace, then the trade-off is shifted toward the marketplace for long-tail (respectively, short-tail) products. We thus provide a theory of which products an intermediary should offer in each mode. We also provide some empirical evidence that supports our main results. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.2042 . This paper was accepted by Bruno Cassiman, business strategy.
Highlights
Retailers like 7-Eleven, Eastbay.com, Lowes and Zappos.com act as intermediaries by reselling the products they purchase from suppliers to buyers
We focus on a single, non-contractible decision variable, which can be interpreted as the choice of some marketing activity that occurs through this particular intermediary and that is undertaken by the party holding residual control rights
The marketplaces we study are a type of multi-sided platform
Summary
Retailers like 7-Eleven, Eastbay.com, Lowes and Zappos.com act as intermediaries by reselling the products they purchase from suppliers to buyers. We focus on a single, non-contractible decision variable, which can be interpreted as the choice of some marketing activity that occurs through this particular intermediary and that is undertaken by the party holding residual control rights (i.e. the reseller, or each independent supplier in the case of a marketplace). Examples of such an activity include the way in which a product is displayed, or the extent to which its brand is promoted relative to its features (e.g. through in-store signage or sales staff). We offer some empirical evidence that corroborates our model’s predictions
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