Merchant or two-sided platform?

Andrei Hagiu

This paper provides a first pass at clarifying the economic tradeoffs between two polar strategies for market intermediation: the "merchant" mode, in which the intermediary buys from sellers and resells to buyers; and the "two-sided platform" mode, under which the intermediary enables affiliated sellers to sell directly to affiliated buyers. The merchant mode yields higher profits than the two-sided platform mode when the chicken-and-egg problem due to indirect network effects for the two-sided platform mode is more severe and when the degree of complementarity/substitutability among sellers' products is higher. Conversely, 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.