Advertising versus Brokerage Model for Online Trading Platforms

58 Pages Posted: 6 Nov 2012 Last revised: 11 Aug 2015

See all articles by Jianqing Chen

Jianqing Chen

The University of Texas at Dallas, Jindal School of Management

Ming Fan

University of Washington - Michael G. Foster School of Business

Mingzhi Li

Tsinghua University - School of Economics & Management

Date Written: September 30, 2012

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 of under the advertising model because of larger participation by the sellers for the platform's free service. Sellers are better of 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 of under the advertising model. Lastly, the advertising model generates more social welfare than the brokerage model.

Keywords: Revenue Models, Two-Sided Market, C2C Platform

JEL Classification: D47, M2

Suggested Citation

Chen, Jianqing and Fan, Ming and Li, Mingzhi, Advertising versus Brokerage Model for Online Trading Platforms (September 30, 2012). Forthcoming in MIS Quarterly. Available at SSRN: https://ssrn.com/abstract=2164380 or http://dx.doi.org/10.2139/ssrn.2164380

Jianqing Chen (Contact Author)

The University of Texas at Dallas, Jindal School of Management ( email )

800 West Campbell Road
Richardson, TX 75080
United States

Ming Fan

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Mingzhi Li

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
635
Abstract Views
2,708
rank
44,087
PlumX Metrics