Lowering the Garden Wall: Marketplace Leakage and Quality Curation
43 Pages Posted: 30 Oct 2024 Last revised: 15 Dec 2024
Date Written: February 01, 2024
Abstract
What are the unintended effects of policies that reduce the cost of disintermediating from market platforms? I show that it may be profitable for a platform to reduce the intensity with which it screens sellers while simultaneously offering a robust refund policy to insure consumers against possible transactions with low-quality sellers. This reduces the incentive to disintermediate by shrinking consumer confidence in sellers who steer consumers to direct transactions, reducing consumers' willingness to pay for off-platform transactions. The refund policy encourages low-quality sellers to only offer direct transactions while maintaining consumer willingness to pay for products sold through the platform. Introducing a rival platform increases seller welfare and eliminates this unintended effect by deterring platforms from allowing low-quality sellers to join their marketplaces for fear of losing consumers to their rival.
JEL Classification: D40, L15, L43
Suggested Citation: Suggested Citation