Technology and Disintermediation in Online Marketplaces

Abstract

With the development of communication technology that makes online transactions easier, there is also an increased risk of disintermediation—sellers and buyers circumventing a platform to transact directly—in online two-sided marketplaces. Such disintermediation may lead to significant revenue loss for online platforms. However, it remains unclear how the characteristics of platforms affect a platform’s vulnerability to disintermediation. Using the blockade of Skype by the Great Firewall (GFW) of China as a natural experiment, we examine how online communication technologies affected disintermediation and transaction outcomes in a large US online freelance marketplace. Results show that restricting alternative communication technologies, which platforms struggle to monitor, avoids further disintermediation by around 18%. The effect is potentially due to economic frictions in transactions, as the disintermediation reduction is greater for high transaction cost jobs such as timely jobs, communication-intensive jobs, or high-skilled jobs, as well as for cost-sensitive users such as experienced users or personal instead of business users. With these results, platforms can reduce disintermediation risk during investment and market entry decisions.

Keywords: Disintermediation, Online Marketplace, Intermediary, Communication Technology

JEL Classification: L14, L86, O33