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Many digital marketplaces reap the benefits of adopting a hybrid model. They do this by setting the rules of trade on the platform, collecting commission over third-party sales, and actively selling their own products within the market. This column argues that hybrid platforms set high commissions on third-party sellers in order to enjoy a larger market share for their own products. This harms both consumers and sellers by raising consumer prices and reducing choice. The column also discusses policy tools to mitigate distortions arising from the ‘hybrid model’.
Many digital marketplaces – such as Amazon – have adopted a ‘hybrid model’. This means they sell their own products at the same time as hosting third-party products. Policymakers have been increasingly concerned about dominant (or ‘gatekeeper’) hybrid platforms, arguing that their double role as both ‘the referee and a player’ can distort competition in the marketplace.
A hybrid platform can use third-party seller commissions to raise its rivals’ costs, thereby increasing its margin from its own products and revenues from third-party product sales. At the same time, platform-owned products (e.g., Amazon’s own-branded items) increase variety and intensify competitive pressure against third-party sellers, potentially lowering overall prices. Given that the platform should do the right thing for consumers, since this means higher traffic and higher volume of trade, at first it is unclear whether hybrid mode harms consumers. The potential for more choice and lower prices sounds like a good outcome.
But not all is as it first seems. This column presents analytical findings illustrating these countervailing forces. The key research question is whether the entry of the platform within the marketplace harms third-party merchants as well as consumers. In our recent study, we show that the hybrid model induces the platform to collect a higher commission from third-party sellers to favour its own products. This leads to higher consumer prices and less variety of products on the platform. This reduces both consumer and seller welfare compared to a ‘pure marketplace’ (one which does not sell platform-owned products).
Digital marketplaces: facts and the hybrid model
Online shopping is extremely popular. Last year, e-commerce accounted for 15.5% of total retail revenue ($1,119 billion) in the United States and 16% of retail revenue ($566 billion) in Europe (Statista, 2024). Marketplace platforms charge their sellers a percentage fee over revenues, as well as fees for add-on services (for fulfilment, etc.). For example, third-party sellers selling on Amazon must pay 15% commission on average. Apple and Google’s app stores both charge third-party developers an average of 30% commission for in-app purchases.
Many marketplaces run a hybrid business model. Examples include big tech firms like Amazon, Apple and Google, as well as retail giants like Walmart and Zalando. The key difference from a pure marketplace – such as eBay – is that the hybrid platform acts both like a referee (setting the rules of trade, collecting commissions, etc.) and a player (participating in sales competition). In contrast, in a pure marketplace the platform is ‘only’ the referee. For example, eBay does not currently sell its own range of items – it simply facilitates trade.
Another important fact is that digital marketplaces have become the ‘gatekeepers’ for millions of third-party sellers and consumers to trade. For example, 59% of paid units on Amazon were by third-party sellers in 2022. In the United States, 2.3 million third-party sellers (37% of the total number of merchants) rely on Amazon as their sole income source (House Majority Report, 2020). In fact, Amazon is dominant in both American and European e-commerce markets, with market shares of 41% in the United States, 39% in the UK, 47% in Germany, and 51% in Italy (Statista, 2024).
Antitrust concerns, recent cases and regulations
Policymakers have argued that gatekeeper platforms might distort competition within the marketplace. Important policy concerns include whether dominant platforms’ hybrid mode harms third-party sellers and consumers, whether they charge too high commissions and fees, and whether they impede entry and innovation by other platforms or sellers via their contractual provisions, such as high commissions and preventing sellers from using alternative payment channels (to circumvent platform fees).
These concerns have been at the centre of recent legal cases in Europe (the European Commission’s cases against Amazon, Google and Apple) as well as in the United States (Epic Games lawsuits against Apple and Google; FTC lawsuit against Amazon; and US DOJ lawsuits against Apple.) Recently, the EU Digital Markets Act (DMA) and Digital Services Act (DSA) have banned certain practices and imposed rules on gatekeeper platforms. And American lawmakers proposed five bills in 2021 that would impose similar regulations on dominant digital platforms.
The effects of hybrid model
In our study we construct a theoretical model of a hybrid platform. The firm sells its own products in lots of ‘markets’ where it also hosts many small third-party sellers. By collecting a percentage commission on third-party sales revenues, the platform can affect the number of sellers participating in the marketplace. This means it has some control over the amount of competition and pricing within the individual product markets it facilitates.
We show that the hybrid platform gets a bigger market share for its own products by setting a higher commission. Crucially, this reduces competition (compared with a pure marketplace). In our paper we call this ‘insidious steering’. In theory, this practice might be costly for the platform, as it reduces consumer participation and lowers the volume of trade on the platform (since consumers value variety and dislike high prices). But we find that insidious steering is in fact profitable for the hybrid platform, and becomes more profitable if the platforms’ own products improve (in terms of higher quality or lower cost).
Modelling an e-commerce marketplace
In our model we assume that the platform and its third-party sellers are quite different. First, the platform typically sells a range of products in any market segment, meaning it has substantial market power in each segment and so its pricing affects the market. In contrast, third-party sellers have such small market shares that their pricing choices do not affect the market price (the quantity of a product in demand is equal to the quantity that is supplied). Second, the sheer size, reputation, market presence and dominant position of the platform gives it significant advantages. After all, it is the one setting the commission rate and it will do so by considering how the fee affects smaller sellers’ response in choosing to sell on the platform and pricing their product. Third, third-party sellers rely on the gatekeeper platform as their only access to consumers.
We also assume fluid entry of sellers to the platform and positive network effects between consumers and sellers. This means more consumers visit the platform when there are more choice and prices are lower, and more sellers enter the platform when there are more consumers.
Policy implications
Insidious steering is different from ‘blatant steering’, such as prioritising own-brand products in the rankings of the marketplace. It is implicit, happening via charging higher seller commissions. This means it is harder to detect insidious steering than blatant steering. Crucially, a behavioural ban on blatant steering (which was introduced by the EU DMA regulation on gatekeeper platforms) will not be effective to prevent insidious steering. So, perhaps the answer is to mitigate the incentives to do insidious steering.
But it’s not as straightforward as banning hybrid models. We show that banning the hybrid model (as proposed by the United States and implemented in India) benefits consumers if and only if the platform becomes a pure marketplace after the ban. The ban actually harms consumers if the platform becomes a pure reseller (shutting down its marketplace function, which Amazon’s ‘Business-to-Business’ platform did in India).
Taxation could be an alternative instrument to a structural ban on the hybrid model. Yet, in 2019 the French government introduced the Digital Services Tax on Amazon’s marketplace revenues (to create fair playing field in competition against Amazon marketplace for retailers paying value-added-taxes). Amazon reacted to the tax by raising its third-party commissions by the same amount. Our theoretical analysis shows that taxing the hybrid platform’s commission revenues from third-party sellers raises commission rates and harms consumers (by increasing prices and reducing choice).
But fiscal measures can work. We propose taxing the platform’s own product revenues to correct distortions arising from hybrid model. Taxing the platform’s reseller revenues reduces the platform’s incentives to promote/protect their own products and improves overall market allocation.
Big picture
We find that the hybrid model in e-commerce platforms hurts consumers. This is in sharp contrast to the findings in other studies (Etro, 2021; 2023; Hagiu et al., 2022; Anderson and Bedre-Defolie, 2022), which suggest it is good to allow the platform to sell its own products. We argue that this idea does indeed apply if we consider markets with very little product differentiation and when seller entry to the platform is not very fluid. But in our study, we include consumers’ differential tastes for products and allow the platform to control entry of differentiated third-party sellers. In each market, both the platform products and third-party products can make some sales. This captures the trade-off that a hybrid platform faces: charging lower commissions to encourage seller entry to the market or charging higher commissions to shift demand towards its own products. We find that the platform’s presence with its own products reduces choices and raises their prices in the market, harming consumers and third-party merchants.
Digital marketplaces are dynamic and competitive forces change fast. Policymakers should maintain focus on fostering competition and innovation by ensuring that big tech platforms (and other large e-commerce firms) do not exploit their ‘gatekeeper’ position. Policy interventions reducing insidious steering incentives of the platform are essential to guarantee more product choices and lower prices in hybrid marketplaces.
Author: Özlem Bedre Defolie