Dealership or Marketplace: A Dynamic Comparison

Abstract

We consider two business models for a two-sided economy under uncertainty: dealership and marketplace. Although both business models can bridge the gap between demand and supply, it is not clear which model is better for the firm or for the consumers. We show that while the two models differ substantially in pricing power, inventory risk, fee structure, and fulfillment time, both models share several important features, with the revenues to the firm from the two models converging when the markets are thick. We also show that for thick markets there is a one-to-one mapping between their corresponding optimal policies. We provide guidelines and insights as to which business model is preferable under different conditions when the markets are not thick.

Keywords: dynamic pricing, business models, dynamic game, Markov perfect equilibrium, structural properties