Hybrid Marketplaces with Free Entry of Sellers

Abstract

We study a hybrid marketplace such as Amazon that sells its own products and sets commissions on third-party sellers that engage in monopolistic competition with free entry. For a large class of microfoundations based on a representative agent, the introduction of its own products by the marketplace is neutral for consumer welfare for a given commission; but this product introduction exerts an ambiguous impact through changes of the commission. A “demand substitution mechanism” pushes for a higher commission; but an “extensive margin mechanism” pushes for a lower commission that is aimed at attracting new sellers and more purchases on the marketplace. For instance, with constant demand elasticities, a hybrid marketplace sets a lower (higher) commission rate and increases (decreases) consumer welfare compared to a pure marketplace if its products face a less (more) elastic demand.