Advertising versus Brokerage Model for Online Trading Platforms

Jianqing Chen (), Ming Fan () and Mingzhi Li ()
Additional contact information
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

No 12-12, Working Papers from NET Institute

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.

Keywords: Revenue Model; Business Model; Two-Sided Market (search for similar items in EconPapers)
JEL-codes: D47 M2 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2012-09
New Economics Papers: this item is included in nep-mkt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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