Working Paper | HBS Working Paper Series | 2014

Marketplace or Reseller?

by Andrei Hagiu and Julian Wright

Abstract

Intermediaries can choose between functioning as a marketplace (on which suppliers sell their products directly to buyers) or as a reseller (purchasing products from suppliers and selling them to buyers). We model this as a decision between whether control rights over a non-contractible 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 tradeoff is shifted towards 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 tradeoff is shifted towards 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.

Keywords: Intermediation; multi-sided platforms; control rights; marketing; Multi-Sided Platforms; Marketing Channels; Distribution Channels;

Citation:

Hagiu, Andrei, and Julian Wright. "Marketplace or Reseller?" Harvard Business School Working Paper, No. 13-092, May 2013. (Revised July 2013, January 2014.)