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Merchant or Two-Sided Platform?

The Review of Network Economics

Vol. 6, Issue 2 - June 2007, pp 115-133

  Andrei Hagiu
Strategy Unit, Harvard Business School
E-mail: [email protected]

  This paper provides a first pass at comparing two polar strategies for market intermediation: "merchant" mode - buying from sellers and reselling to buyers - and "two-sided platform" mode - enabling affiliated sellers to sell directly to affiliated buyers. The merchant mode is more profitable when the chicken-and-egg problem for the two-sided platform is more severe and when the degree of complementarity among sellers' products is higher. The platform mode is preferred when seller investment incentives are important or when there is asymmetric information regarding seller product quality. We discuss these tradeoffs in the context of several prominent digital intermediaries.

Keywords: Two-sided markets, platforms, intermediaries, network effects.

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