Platform Disintermediation: Information Effects and Pricing Remedies

61 Pages Posted: 9 Mar 2023 Last revised: 10 Feb 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 typically generate revenue by matching prospective buyers and sellers and extracting commissions from completed transactions. Disintermediation, where sellers transact offline with buyers to bypass commission fees, can undermine the viability of these platforms. While transacting offline allows sellers to avoid commission fees, it also leaves them fully exposed to risky buyers given the absence of the platform’s protections. In this paper, we examine how disintermediation and information quality – specifically, the accuracy of the signal sellers receive about a buyer’s type – jointly impact a platform’s revenue and optimal commission rate. In a setting where transactions occur online-only, an increase in information quality leads sellers to set more efficient prices and complete more transactions, which lifts platform revenue. However, if sellers can transact offline, this effect may be reversed – additional information about buyers can hurt platform revenue by reducing the risk sellers face offline, amplifying disintermediation. Further, while intuition suggests platforms should counter disintermediation by lowering commission rates, in a high-information environment a platform may be better off raising them. Lastly, while charging sellers platform-access fees can hedge against losses from disintermediation, it can fall short of the revenue attained under commission-based pricing when all transactions occur online. Overall, our findings provide insight into the mechanisms through which disintermediation disrupts platform operations and offers prescriptions to platforms seeking to counteract it.

Keywords: Online Platforms, Pricing, Disintermediation, Commissions, Manipulation

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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