Platform Disintermediation: Information Effects and Pricing Remedies

96 Pages Posted: 9 Mar 2023 Last revised: 29 May 2024

See all articles by Shreyas Sekar

Shreyas Sekar

Operations Management Area, Rotman School of Management; Department of Management, University of Toronto Scarborough

Auyon Siddiq

University of California, Los Angeles (UCLA) - Anderson School of Management

Date Written: March 5, 2023

Abstract

Two-sided platforms, such as labor marketplaces for hiring freelancers, typically generate revenue by matching prospective buyers and sellers and extracting commissions from completed transactions. Disintermediation, where sellers transact off-platform with buyers to bypass commission fees, can undermine the viability of these marketplaces. Although circumventing the platform allows sellers to avoid commission fees, it also leaves them fully exposed to risky buyers (given the absence of the platform’s payment protections) and incurs switching costs (given the absence of the platform’s transaction infrastructure). In this paper, we consider interventions for addressing disintermediation, focusing on the pricing and informational levers available to the platform, where the latter refers to the accuracy of the signal sellers receive about buyers’ riskiness. First, while intuition suggests platforms should counter disintermediation by lowering commission rates, in a high-information environment a platform may be better off raising them. Further, a platform may strictly benefit from sellers receiving a partially-informative buyer signal (i.e., not perfectly revealing nor concealing a buyer’s riskiness), particularly when switching costs are low. Finally, while charging sellers platform-access fees can immunize the platform from disintermediation, it can fall short of the optimal revenue under commission-based pricing. We also examine the efficacy of banning sellers that are caught disintermediating, and extend our findings to a setting with repeated transactions. Overall, our results shed light on how disintermediation disrupts platform operations and offers prescriptions for platforms seeking to counteract it.

Keywords: Two-sided platforms, disintermediation, pricing, commissions

JEL Classification: Platforms

Suggested Citation

Sekar, Shreyas and Siddiq, Auyon, Platform Disintermediation: Information Effects and Pricing Remedies (March 5, 2023). Available at SSRN: https://ssrn.com/abstract=4378501 or http://dx.doi.org/10.2139/ssrn.4378501

Shreyas Sekar (Contact Author)

Operations Management Area, Rotman School of Management

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Department of Management, University of Toronto Scarborough

1265 Military Trial
Scarborough, Ontario M1C 1A4
Canada

Auyon Siddiq

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

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