Antitrust and Unfair Competition Law

Competition: Fall 2020, Vol 30, No. 2


By Neil Dryden, Sergey Khodjamirian, and Jorge Padilla1


This article explains that that the decision of a marketplace to operate its own reseller in competition with third-party sellers within the platform is likely to spur competition to the ultimate benefit of consumers. A marketplace will profit by supplying directly as a reseller when that duality is needed to (a) achieve selection parity with other distribution channels and/or (b) prod third-party sellers to compete more aggressively. The success of a hybrid marketplace (i.e., an online business that is both a marketplace and a reseller operating in that marketplace) may require it to support its retail operations in order to increase the appeal of its store vis-à-vis other stores. The effect of such strategy on the incentives to innovate of other sellers in the marketplace is in principle ambiguous but the available evidence suggests it may be positive.

KEYWORDS: antitrust, business models, hybrid marketplaces, regulation

JEL CODES: K21 (Antitrust Law), L13 (Oligopoly and Other Imperfect Markets), L40 (Antitrust Issues and Policies: General)


Several authors and policymakers have expressed concern that a "platform"2 that is both a service provider or a seller and an intermediary for other service providers and sellers may infringe the competition laws if, as an intermediary, it enjoys a dominant position and favours its own service provider or seller.3 Some have even proposed that dominant platforms be prohibited from adopting so-called "dual" or "hybrid" business models and demanded the structural separation of the most prominent digital platforms.4 This proposal is based on the belief that such duality creates a conflict of interest that can be exploited to further entrench the platform’s alleged dominance, thwart competition, and stifle innovation.

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We do not dispute here that discrimination by dominant vertically integrated firms, including hybrid platforms, may distort the competitive process and cause consumer harm in certain circumstances. Instead, our main claim in this article is that not all hybrid platforms are identical. Differences in their business models and the dynamics of the markets where they operate are crucial to understand their incentives and the effects of their conduct. More specifically, we explain that e-commerce platforms (or "marketplaces"), which sell products and services to consumers, have no incentive to marginalise firms that distribute through them, restrict competition and/or thwart innovation by such firms.

Marketplaces seek to increase the volume that is sold through their stores over long periods of time. Such volume increases when consumers can find a wide selection of products at competitive prices upon visiting the store. However, third-party sellers using the marketplace to distribute their products may not have the incentive to offer as many varieties through that store as they do through other channels and, especially, their own direct distribution channels (their physical or online stores). Also, they may not have incentive to price competitively the varieties sold through the marketplace, especially when they possess market power. Likewise, they may not provide the right product quality or may fail to deliver promptly and satisfactorily the products acquired through the marketplace.

Firstly, distributing directly may save third-party sellers some commissions: not only because commissions are not paid on their own direct channels, but also because the simple existence of this channel may work as a credible outside option that naturally balances the bargaining power in favour of third-party sellers.5 Secondly, marketplaces increase consumers’ ability to compare price and non-price terms and, therefore, may encourage greater competition. High prices, low quality and insufficient product variety reduce the marketplace’s volume and profit.

Marketplaces may increase transactions and profits by adopting a hybrid business model, i.e., supplying directly as resellers in their platforms, adding the missing varieties with the aim of achieving selection parity with other distribution channels, and pricing competitively to make sure that its customers can see the best deal.6 They may do so by selling third-party brands through their own reseller arm or by selling their own (private) labels. However, this strategy may succeed only if the marketplace’s own reseller arm is able to complement the marketplace’s portfolio of product offerings by adding products that are sufficiently attractive to consumers.

Arguably, the marketplace’s efforts to increase the appeal of the products or services offered by its reseller arm may be regarded as discriminatory and anticompetitive. However, that interpretation is in our opinion incorrect. Firstly, the goal of the hybrid marketplace is not to restrict competition but to make its own marketplace more competitive with other distribution channels. The marketplace enters as a reseller into those product markets where competition is limited, but to do so effectively it needs to offer attractive products at competitive prices without undermining the offers made by third-party sellers operating in the store. Secondly, consumers benefit from lower prices, higher quality and greater variety. Thirdly, a third-party seller’s ability to innovate need not be diminished since the marketplace’s entry only seeks to promote the success of the platform (which in principle could increase the third-party seller’s profitability and, therefore, its incentive to invest in its product portfolio). Fourthly, increased competition increases the sellers’ incentives to invest and, thus, consumers also benefit from more and more disruptive innovation. Finally, entry by the marketplace’s own reseller arm expands the marketplace’s customer base, which, in turn, incentivizes new sellers to join and existing sellers to invest in innovation.

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These findings have implications for policy. Hybrid marketplaces, such as Amazon (or El Corte Inglés in Spain, Selfridges in the UK, Walmart in the US, etc.), enter one side of their platforms with their retail arms to improve the appeal of their range of product offerings and promote their competitiveness with other marketplaces or distribution channels. This is procompetitive and consumer welfare enhancing.

The remainder of this article is organized as follows. In Section II we present three different online business models and investigate, on the one hand, why a marketplace distributing the products of third-party sellers may wish to supply directly as a reseller and, on the other, why a reseller may wish to operate as a marketplace to distribute the products of third-party sellers. In Section III we discuss the incentives of a hybrid marketplace to improve the appeal of its marketplace by increasing the value offered by its own reseller and consider the likely effects of such a strategy on competition and innovation inside its business and across marketplaces. In Section IV we consider an alternative theory—the "value capture" theory—which posits that both the marketplace’s entry as a reseller and the potential bias in favor of its own reseller have the goal of free-riding on third-party sellers’ efforts and the effect of discouraging innovation by these suppliers and making consumers worse off. We explain why the empirical evidence available to us is much more consistent with the procompetitive theory advanced in Section III than with the value capture theory presented in this section. The reason being that in practice the competition faced by marketplaces acts as a discipline device, limiting their incentives and ability to capture value while increasing their incentives to behave in a pro-competitive manner. Section V concludes discussing policy implications.


We explicitly consider three different e-commerce business models in this article: the "reseller model," where the firm acquires products from suppliers and resells them to end-consumers; the "marketplace model," where it intermediates between sellers and buyers, and charges one or both sides; and the "hybrid model," where the platform acts both as reseller and a marketplace. The marketplace model is a pure intermediation model, whereas in the hybrid model the "platform" is both an intermediary and a seller.

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A. The Choice of Business Model

There is an extensive literature discussing the pros and cons of the three e-commerce business models described above.7 According to this literature, no business model universally dominates the others from a managerial or a social welfare perspective; it all depends on the facts.

One important consideration when assessing their relative profitability, for example, is who is better placed to choose the right way of marketing the product.8 It may be the reseller, because it can draw from the experience of selling many different products from many different suppliers. It may be the sellers distributing through an arm’s length marketplace, because their products are highly differentiated or even rather unique. Or, if the answer varies from one product to another within the firm’s product portfolio, then the right business model may be the hybrid model.

Another important factor to consider when choosing a business model is the possible existence of "cross-product market spillovers."9 Do higher marketing efforts for one product affect the demand for other products? If the answer is yes, then it is optimal to choose the reseller model, because the reseller can better internalize those externalities. Resellers may also be more efficient at selling incremental units to consumers due to economies of scale of stocking, distribution and marketing, especially when they are selling a narrow range of high demand products.10 In contrast, marketplaces may be more efficient when selling a broad range of low demand products.

Resellers may be better able to verify and certify the quality of goods sold by their suppliers due to economies of scale.11 They may also have a greater incentive to do so given that buyers may find it easier to hold them accountable when the quality of their products is poor. Sellers may be reluctant to join a marketplace that cannot guarantee the quality of the products sold by other sellers for fear of the reputational concerns that the latter’s quality choices may have on its own sales.12 Resellers may also be better able to aggregate the purchasing power of their buyers than marketplaces, given that the latter limit themselves to facilitate transactions but do not set the terms of those transactions.13 In a sense, a reseller represents the collective demand of its buyers when negotiating wholesale prices with its suppliers. This is not what a marketplace does; the marketplace charges commissions for facilitating transactions but has no direct stake on those transactions. On the other hand, and precisely because the marketplace does not set end-consumer prices, the well-known double marginalization problem is less severe in the marketplace model.14 This makes it particularly attractive when the reseller or the marketplace compete with direct distribution channels, as it is most often the case.

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B. The Logic and Competitive Effects of Hybrid Marketplaces

There is evidence that companies often change their business models. Some move from being resellers to also operate marketplaces, like Amazon and many department stores around the world have done. Others, like Tesco, Walmart, etc. start selling third-party products and then introduce their own private labels. In this section, we first explain why a marketplace may have the incentive to adopt a hybrid business model, acting as both a reseller and a marketplace, and why such a business model choice is likely to result in fiercer competition and increased consumer welfare. Then we will consider the reasons why a reseller may choose to become a hybrid platform.

Because marketplaces typically charge per transaction (unit or ad valorem) fees, they benefit with increases in the volumes sold through their stores, especially when such increases are sustained over long periods of time. Such volumes will be greater when consumers can find a wide selection of products at competitive prices in any of their visits. Many consumers exhibit a preference for variety;15 others have one-stop shopping preferences, i.e., prefer to concentrate their purchasers at a store to save on shopping costs;16 and most (if not all) prefer to buy at discounted prices.

Many marketplaces will thus have the incentive to distribute a wide range of product varieties, including some which may be regarded as close substitutes, both to increase product choice and encourage price competition within the marketplace.17Those stores will naturally seek to offer a wider selection of products and everyday lower prices than their competitors.

The problem typically faced by marketplaces, whether online or offline, is that the third-party sellers’ and marketplace’s incentives to introduce new products or to offer lower prices and first-rate delivery services are misaligned.18 This is because the third-party seller fails to internalize the external effect of its pricing and non-pricing decisions on the sales of other sellers, and on the marketplace’s overall reputation and profits. For example, when considering whether to introduce a new variety, an individual seller will not factor in its calculation that its decision to do so may attract new consumers to the marketplace and, hence, increase the sales and profits of other third-party sellers and, consequently, the attractiveness and profitability of the marketplace. For the very same reason, third-party sellers may set higher prices, offer lower quality, and distribute less promptly and reliably, than the marketplace would like them to.

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This misalignment between the incentives of the marketplace and the third-party seller occurs whether sellers have access to other distribution channels or not, but it is much more likely to occur if they do, and especially if they can distribute directly through their own channels. There are several reasons for this. Firstly, distributing directly may save them the marketplace’s fees and commissions. Also, since those commissions are, as mentioned, typically charged by transaction, they tend to increase the third-party sellers’ marginal costs of selling within the platform, thereby implying that some product varieties may be, simultaneously, offered in their own distribution channels at lower prices. Thus, third-party sellers will be concerned about cannibalising their direct distribution when launching new products or pricing more aggressively in the marketplace; a concern that is foreign to the marketplace.

Secondly, third-party sellers with access to alternative distribution channels may use the marketplace to advertise their brands given its large consumer reach, but distribute their bestsellers or their cheaper products through other channels where they pay lower fees (e.g., other marketplaces or e-commerce sites) or no fees at all (their own distribution channels).

Thirdly, consumers’ ability to compare the offers of competing suppliers is facilitated by the marketplace, especially in the case of an online hybrid marketplace. The greater transparency in online marketplaces will likely force sellers to compete more aggressively, as they will no longer be able to price-in any search costs or shopping costs consumers may face. Moreover, the platform may enter the marketplace as a strategic defensive reaction against third-party sellers who sell their products at uncompetitive prices.19

Finally, when third-party sellers utilize other distribution channels, their portfolio, pricing and quality decisions at those other channels will account for their impact on their own sales in the marketplace but, as before, will not factor in the effect of such decisions on the overall sales volume channelled through the marketplace. The number of varieties sold through the marketplace, their quality and prices are more likely to be suboptimal from the platform’s point of view, as well as from the viewpoint of consumers, when sellers have market power, whether that power has a unilateral origin (stemming either from product differentiation or consumer inertia) or is the result of industry-wide tacit coordination. Such market power, whether unilateral or collective, will depress volume and hurt the marketplace and its consumers.

The marketplace may try to address these problems by adopting a hybrid model, supplying directly as a reseller so as to add the missing varieties with the aim of achieving selection parity with other distribution channels, increase the quality of its offerings,20 and price competitively to make sure that its customers can see the best deal. This increases the appeal of the marketplace in the short-run and, especially, its chances of success in the long run. Consumers will be attracted to marketplaces with a wide selection of products, distributed efficiently and commanding low prices. This will in turn increase the number of sellers wishing to join the platform and their incentives to offer more variety and greater quality on that platform, thus attracting even greater number of consumers, and so on and so forth.

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The hybrid marketplace will prioritize its reseller’s investments in varieties which are either not on offer at the marketplace (especially when they can be found elsewhere) or are currently being offered at uncompetitive prices or quality of service by existing sellers. Furthermore, if offering additional products is costly, we would expect the marketplace’s reseller to prioritize products expected to maximise volume on the marketplace (e.g., popular products).21

The product and pricing choices of the marketplace’s own reseller will naturally differ from those of the other sellers operating in the marketplace. It may enter products that no third-party seller finds attractive, because of the positive externalities that the availability of new varieties generates on the existing ones when consumers have preference for variety and/or engage in one stop-shopping. And for the same reasons, it is also likely to commercialize products that are already on offer but at high prices, by offering cheaper varieties of those products.

In short, a marketplace may choose to adopt a hybrid business model in order to become a more effective competitor in the distribution market by offering more options, higher quality, and cheaper prices. In this respect, its business model choice is aligned with consumers, but may frustrate third-party sellers, especially those with market power.

A reseller may also adopt a hybrid business model for reasons that are no different than those described above. The reseller may be unable to offer as wide selection of products as other resellers or marketplaces. Investing in new varieties to bridge the gap is costly and risky. But that narrower portfolio places the reseller at a serious competitive disadvantage when it comes to consumers with a preference for variety of product offerings or one-stop shopping preferences.22 The reseller may also be unable to match the prices offered by competitors benefiting from economies of scale and scope originating in their larger volumes and their wider product portfolios.

These disadvantages can be mitigated or eliminated when the reseller adopts a hybrid business model. This move can be interpreted as an effort to "recruit" other sellers in the quest for attracting consumers.23 The downside of this strategy is that the hybrid reseller will have to compete with other sellers operating in the same distribution channel. But the upside is that the marketplace’s attraction (or "gravity," using the language of trade theory24) is much greater than the reseller’s, since the collective portfolio of products offered by the marketplace is much wider than that offered by the single reseller. Again, such a business model choice would be likely to result in fiercer competition and increased consumer welfare.

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Given the negative impact of competition on the profits of third-party sellers, there is a risk that they would simply stay away from the newly launched marketplace, thus defeating the adoption of a hybrid business model. In a recent paper, Hagiu et al. (2020) show that this need not be the case. In their model, the multi-product reseller has the incentive to transform itself into a marketplace by hosting rivals,25 since this reduces the additional shopping costs to consumers of buying products from the rivals’ versions of the reseller’s non-core products. While this makes those rivals closer competitors, it turns the competitor into a complementor, thus increasing demand for the reseller’s core products. It follows that this strategy can be both beneficial for the reseller and its hosts.


The success of the hybrid strategies described in the previous section is highly uncertain. The hybrid business will have to overcome many hurdles to ensure that its own reseller can compete effectively and in a levelled playing field with sellers distributing through other marketplaces and other distribution channels, including their own distribution channels.

The hybrid marketplace’s reseller will have to persuade consumers to switch away from competing marketplaces or third-party sellers’ own direct distribution channels. Third-party sellers with their own distribution channels may, for example, engage in "loss leading"—selling below cost at their own distribution channel the varieties that are also sold on the hybrid marketplace in competition with the hybrid marketplace’s reseller, while selling at a high enough price those varieties that are only distributed through its own channel. This strategy could limit the success of the hybrid marketplace’s reseller and, therefore, defeat the goal of promoting the marketplace.26

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A. Competing with Alternative Distribution Channels by Launching An Effectively Competitive Reseller

A marketplace will only be able to achieve the goal of improving the appeal of its own store by launching its own reseller if the latter can offer sufficiently attractive varieties and at competing prices. This is not at all easy in light of the multiple hurdles noted above, especially if the products in question are experience or credence goods.27 Thus, the hybrid marketplace will have to invest in the appeal of its own reseller arm so that it can steer price and non-price competition in the store, thereby increasing the store’s traffic, which is a key dimension in terms of its sustainability and attractiveness vis-à-vis competing marketplaces and other distribution channels. This strategy is rivalry and welfare enhancing.28

The marketplace’s ultimate goal is not to advance its own retail arm; if it wanted to do so it would not allow third-party sellers to sell products in competition with its own reseller. The hybrid marketplace’s goal is not to restrict competition within the platform, but to spur it, in order to make its marketplace more competitive. The marketplace enters as a reseller into those product markets where competition is limited, either because prices are too high or there is too little product variety or quality is lacking. Consumers benefit from lower prices and greater variety, and third-party seller’s ability to innovate is not diminished since the marketplace’s entry only eliminates supra-competitive rents (i.e., it does not impede them from obtaining a fair return on their investments).29 Furthermore, increased competition increases the third-party sellers’ incentives to invest in innovation and, thus, consumers also benefit from more and more disruptive innovation.

So, for example, when facing incumbents with established brands, selling at high prices in the marketplace and possibly offering lower prices and superior delivery services through their own direct distribution channels, the hybrid marketplace’s reseller will likely find it optimal to enter selling a cheaper product and offering fast and costless delivery. Incumbents may try to match on both dimensions, and they may also try to differentiate their products further in order to relax price competition. Moreover, entry by the reseller will likely attract more consumers to the marketplace. The expanded customer base would incentivize more sellers to join the platform and existing sellers to invest more.30

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Arguably, the marketplace could increase the appeal of its platform by subsidizing the entry of new sellers or, at very least, reducing their access, listing and usage fees significantly. This would increase the marketplace’s ability to attract new sellers and induce them to introduce new varieties and price more aggressively. This strategy is complementary to the hybrid strategy discussed so far. However, as explained by Belleflamme and Toulemonde (2009) and (2010), this strategy may fail to deliver,31 since the resulting increase in competition within the marketplace may discourage sellers from joining the marketplace in the first place. Therefore, the marketplace may have no choice but to enter itself with its own reseller.

B. Welfare-Enhancing Limitations on the Information Disclosed to Third Parties

Platforms operating different business models and competing in markets characterized by different dynamics will have different incentives in connection with the amount and nature of the demand information that is collected, as well as with the way in which that information is handled. In principle, online platforms with access to demand data can target their offerings more effectively. On the one hand, this may improve consumer welfare to the extent that consumers are more likely to be served the products they seek. On the other, consumers may dislike intrusive targeting, oppose price discrimination and be concerned about the potential misuse of the information that is collected from them when they make deals at a given platform. As a result, consumers are more likely to express concern about the scope and the amount of data the online platform extracts from them when they anticipate that such information may be transmitted widely and, thus, more likely land in wrong hands.

As far as information is concerned, marketplaces will use the consumer data generated at their stores to increase their appeal in competition with other stores. They have the incentive to provide demand information to third-party sellers if that helps them to improve their offers and increase output at the store. Hybrid marketplaces will in addition employ that data to focus their own reseller’s activities on the products that consumers demand but where the offer of the marketplace is most deficient (for example by comparison to the selection and prices offered by other distribution channels of all sorts).

Marketplaces, including hybrid ones, will restrict the information shared with third-party sellers in order to limit the scope for price discrimination, when price discrimination is not prohibited. They may also restrict the information shared with third-party sellers in the platform if they may use that information elsewhere, especially if they use it in ways that are contrary to the interests of the marketplace’s customers. This is because in using such data third-party sellers likely will not take account of the negative implications for the marketplace from the misuse of such data or the use of the data in a way that induces consumers to leave the marketplace (e.g., because the data is used to engage in consumer welfare-reducing price discrimination).

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For these reasons there is no basis to presume that consumers are hurt when hybrid marketplaces limit the information provided to third-party sellers in their platforms. There are pro-competitive reasons both for providing third-party sellers with very extensive support including some data and analytics that increase their participation on the marketplace while, at the same time, restricting the disclosure of information that may be used against the interests of its consumers.


Hitherto, we have explained that a marketplace adopts a hybrid model in order to effectively improve its marketplace’s appeal in response to the actual or perceived lack of effort of third-party sellers and when facing incumbency advantages of the third-party sellers. An alternative explanation, with radically different welfare implications, is that the goal of that strategy is to capture the value generated by those sellers, free riding on their innovations and R&D efforts.

Suppose a marketplace observing which third-party products sell more and at more attractive prices, decides to clone them and sell them at lower prices through its own reseller. Those third-party sellers which developed such products will thus be deprived of an appropriate rate of return. Had they anticipated the marketplace’s opportunistic behavior they might not have invested in them. And, furthermore, they may no longer invest in new products if they fear that the marketplace’s conduct is systemic.

The assessment of the value capture hypothesis requires first considering the motivation of the marketplace to enter as a reseller, and then investigating the effects of that entry on third-party sellers. As regards the marketplace’s entry motivations, we are not aware of any theoretical literature that formally models those incentives. The empirical literature is more informative. It uses platform-owners entry patterns to infer their motivations. Zhu (2019) provides a useful survey of such studies. He concludes that "it is often difficult to infer platform owners’ exact motivations through quantitative analysis because different motivations can lead to the same empirical patterns".32 We concur.

A good example of the limitations of such studies is given by—the otherwise valuable contribution of-—Zhu and Liu (2018),33 who infer that Amazon’s entry patterns are driven by value capture from their finding that Amazon’s marketplace enters the more "popular" products as a reseller. However, that observed entry pattern could equally be explained by a more benign motive, such as ensuring the competitiveness of the marketplace. Firstly, the popular products targeted by Amazon may be relatively underperforming on Amazon’s marketplace; i.e., they may be doing much better on other distribution channels with whom Amazon fiercely competes. Secondly, if Amazon’s goal is to make its marketplace more competitive, it is only rational that it focuses its effort and investment on those products which drive significant volumes and are most likely to be critical to the success of the marketplace.

Whatever the underlying motive behind a marketplace’s decision to adopt a hybrid model, the key question from a public policy perspective is the effect of such a decision on consumer welfare. Therefore, in what follows we focus on signing that effect by reference to the existing theoretical and empirical literature.

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A. Theoretical Considerations

According with Foerderer et al. (2018), "the theoretical mechanisms through which entry [by platforms] might affect complementary innovation, remain understudied."34 It is possible that the entry of the marketplace and the ensuing reduction in the rents of the third-party sellers may affect negatively both the incentive and ability of the latter to invest. This argument replicates the well-known Schumpeterian "appropriability effect" that stresses that incumbents will not invest unless they expect to appropriate sufficient post-innovation rents.35 But it is also possible that, as Arrow (1962) famously argued,36 firms under competitive pressure will try to outperform competitors by producing higher quality or more cost-efficient products and services: product market competition spurs innovation. Indeed, and as noted above, third-party sellers have an incentive to differentiate their offerings in order to escape the increased competition. As highlighted by Carl Shapiro,37 Arrow’s and Schumpeter’s positions are compatible. What is crucial within the context under analysis is that entry by the marketplace owner promotes contestability without severely hurting appropriability. As already explained in the previous section, we believe that to be the case here.

Aghion et al. (2009) have shown that the effect of entry into a market on incumbent innovation and productivity is ambiguous.38 On the one hand, the threat of entry encourages firms close to the "technology frontier" to innovate, because these firms can escape competition by innovating more intensely. This is similar to the "escape of competition effect," identified by Aghion et al. (2001),39 according to which incumbents need to innovate in order to preserve their pre-innovation rents when faced with the possibility the entrant may innovate. On the other hand, entry may discourage innovation by firms that are further behind the technology frontier, because these firms have no hope to win against the entrant.

Aghion et al. (2009), using data about policy changes in the EU and the UK as instruments for the effect of the threat of entry into the UK market, find that, indeed while those firms near the technology frontier respond to entry by innovating more, those lagging behind respond by innovating less. The reason for these different reactions is that the innovation effort needed to maintain the lead over the entrant is smaller for firms that are "neck-and-neck" than for firms that are further back on the technology frontier.

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B. Empirical Evidence

Thus, whether entry encourages or discourages innovation is likely to vary from industry to industry, making it ultimately an empirical question. Foerderer et al. (2018) examine the impact of Google’s entry into photography apps on Android.40 They conduct a difference-in-differences analysis of time-series data on a random sample of 6,620 apps taking advantage of the natural experiment provided by Google’s unannounced release of the Google Photos app in 2015. Innovation here is defined as the decision to release a major update (adding new features or functionalities) for an app. The authors find that "after entry, app developers were more likely to incrementally innovate their photography apps and to release new apps to the affected market category."

Cennamo, Gu and Zhu (2018) consider the effect of platform-owner entry on developers’ innovation outcome in the US video games industry.41 They use data on 5,865 unique video game titles and 14 home video game consoles from January 1995 to June 2008. Innovation is measured through (i) the level of effort, proxied through the number of programmers who worked on a game during its development; (ii) the quality of the game, measured using the scores assigned by critics; and (iii) the portfolio of games produced, measured by the proportional share of titles within each category in the previous year. The authors find that entry with blockbuster games leads developers to focus more on the category that saw entry but exert less effort (which the authors interpret as "free-riding"). When blockbuster entry is "too frequent", third-party developers switch their focus to other video game genres.

Zhu and Liu (2018) study the effect of Amazon entry on third-party sellers’ activity on the marketplace.42 They collect a 0.5% sample of third-party seller products from four product categories listed on the US Marketplace in June 2013, which are then observed again in April 2014. The authors find that third-party sellers affected by Amazon’s entry reduced the number of products they offer relative to unaffected sellers. Yet, the effect on consumers of Amazon’s entry is positive since it reduces the cost to consumers and results in increased sales.

Zhu and Liu (2018) findings regarding the impact of Amazon’s entry on third-party sellers’ marketplace activities have been questioned in a recent paper co-authored by two of the authors of this essay.43 The authors use a richer dataset than Zhu and Liu (2018). In particular, it covers (i) all products ("ASINs") across a wider range of categories and (ii) all sellers of those ASINs. Furthermore, the authors check the suitability of the control group of sellers, as well as running a range of robustness checks and considering a wider set of activity measures (e.g., related to innovation). The authors have estimated a difference-in-difference econometric model, using data for France and Germany on ASINs listed and in stock at Amazon’s Marketplace that achieved at least one sale between June 2016 and June 2018, to compare innovations by comparable sellers, some affected by Amazon’s entry and others not. In particular, they study how Amazon Retail’s entry impacts (a) the size of the seller’s catalogue or portfolio, (b) the probability that a third-party seller launches at least one ASIN new to the Marketplace in a given month, and (c) the number of ASINs new to the Marketplace in that month. They find that Amazon Retail’s entry affects positively and in a statistically significant way the size of catalogues of the third-party sellers operating in the Marketplace, their probability of innovation, and the number of new-to-market ASINs they introduce. In other words, they confirm that the effect of Amazon Retail’s entry is not to disincentivize third-party innovation, as the value capture theory suggests, but rather to spur innovation, as we have explained above.

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Finally, Wen and Zhu (2019) look at how app developers on the Android mobile platform respond to the threat of Google’s entry into their markets. They conduct a difference-in-difference analysis of time series on a randomly selected sample of 3,986 Android apps listed in the Google Play store for the US market. The threat of entry is proxied by Apple’s decisions to enter app markets in the iOS platform. This assumption is justified, since 80% of the time Apple enters first and the Google follows. Innovation is measured in two ways: by the frequency of app updates released by the developer, and the rate of product expansion through the introduction by the developer of new apps to the market. The authors find that when the platform-owner entry threat increases, app developers reduce innovation for the affected apps, but shift innovation to unaffected and new apps. They speculate that these popular app developers may behave in this way to make themselves "attractive acquisition targets" for the expanding platform owner. As we said above, their desire to escape competition may be a more plausible explanation.

In summary, as predicted by the theory, the empirical evidence shows differences from industry to industry. One cannot thus presume that the effect of the marketplace’s entry as a reseller on the incumbent third-party sellers’ investments decisions will be negative. In fact, the available evidence, albeit limited, suggests that it may be, and it often is, positive.

C. Assessing the Relative Plausibility of the Value Capture Hypothesis

According to the value capture story, hybrid marketplaces have the ability and incentive to capture the value generated by third-party sellers operating in their platforms. Their actions will undermine the incentives to invest of those sellers and may thus reduce innovation to the ultimate detriment of consumers.

As we have seen above, there is no theoretical or empirical basis to sustain such a presumption. Although one cannot rule out that the entry of the marketplace as a reseller in its platform may undermine the incentives to invest of its intra-platform rivals, both theory and evidence suggest that this is not only unlikely but that the opposite may be true: the effect of entry may encourage more innovation by incumbents.

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Furthermore, even if that effect on incentives were negative, from a consumer welfare viewpoint, one would need to assess whether the additional competition generated by the marketplace’s decision to adopt a hybrid business model and, possibly, favor its own reseller offsets any potential adverse effects on competition. According to Zhu (2019), "none of the studies [investigating the effects of platform entry] has documented harmful effects on platform users."44 Due to such entry "consumers often gain easier access to these complementary services or can obtain them at a lower cost."45


This article makes two simple policy points. First, the entry incentives of hybrid marketplaces are aligned with those of consumers: they enter as resellers those products and services that are either not served or underserved by third-party sellers. Their entry is thus meant to spur competition and innovation in order to make their platforms more attractive to final consumers. Second, when assessing the competitive implications of seemingly discriminatory decisions by multi-sided online businesses, attention needs to be paid to their underlying business models and the nature and strength of competition in the markets where they compete.

Hybrid marketplaces are naturally motivated by consumer satisfaction, since they risk losing their business if consumers can obtain lower prices, more variety or superior distribution elsewhere. They serve both end consumers and third-party sellers, and they monetize their platforms both by selling to consumers and charging a fee to sellers. Thus, they do not have an incentive to harm either constituency. It is in their financial incentive to make sellers grow.

Marketplaces’ (including hybrid ones) main goal is to increase the appeal of their platforms which, since they are unable to provide enough product variety on their own, requires recruiting third-party sellers. That in turn requires ensuring that those sellers can obtain a high enough rate of return on the platform—sufficiently high to compensate for any loss of sales on other distribution channels. Rather than embarking on exclusionary strategies, therefore, the aim of a marketplace is to induce third-party sellers to participate on the platform. Yet, as explained in Section III above, a marketplace cannot really grow and prosper unless its third-party sellers price aggressively and/or expand the product portfolios available on the platform in order to attain a critical mass of consumers. In order to incentivize them to do so, the marketplace may have to stir the waters by introducing its own reseller and its own brands. Not all third-party sellers will benefit equally from this strategy, and some may even be worse off, but many of them, especially those without market power and more specialized portfolios, as well as consumers will be unambiguously better off.

Because not all multi-sided businesses are born equal or operate equally, public policy cannot treat them equally either. Policymakers, both regulators and antitrust authorities, must be aware of the differences discussed in this article and factor them in when designing their policies, since it is important to distinguish between complaints motivated by rent-shifting aims from those that are legitimately grounded on the protection of competition and consumer welfare.

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1. Neil Dryden is Executive Vice President and Sergey Khodjamirian is Senior Economist at Compass Lexecon. Jorge Padilla is Senior Managing Director at Compass Lexecon and teaches competition economics at the Toulouse School of Economics (TSE) in France. The authors thank Nelson Jung, Salvatore Piccolo, Helder Vasconcelos, and Albert Riera for their comments and suggestions and acknowledge financial support from Amazon. The opinions in this article are the authors’ sole responsibility. Please send your comments to:

2. In this article we define platforms as online businesses which facilitate interactions between individuals or firms subject to within-group and/or cross-group network effects. Such platforms may operate either offline or online and may provide very different services and generate substantial efficiencies. In the retail industry, we would consider resellers that let third parties into their stores to be platforms irrespective of whether they operated offline or online. While the focus of the article is on online business models, no implications regarding market definition should be drawn from such an expositional choice.

3. See, e.g., Lina Khan, Amazon’s Antitrust Paradox, 126 Yale L.J. 710 (2017), available at

4. See, e.g., Lina Khan, The Separation of Platform and Commerce, 199 Columbia L. J. 973 (2019), available at

5. Put it another way, the marketplace will have limited market power when setting (access and other) fees to third-party sellers with their own direct distribution channels.

6. As explained in Section II.B. a reseller may also adopt a hybrid business model for reasons that are no different to those. Once it operates as a hybrid marketplace it will have to deal with the same conflicts of interest discussed in connection with any other hybrid marketplace, regardless of its origins.

7. See, e.g., K. Jerath and Z. Shang, Store within a Store, 47 J. Mktg. Res. 743 (2010); A. Hagiu and J. Wright, Marketplace or Reseller?, 61 Mgmt. Sci. 184 (2015); A. Hagiu and J. Wright, Multi-sided Platforms?, 43 Int’l J. Indus. Org. 162 (2015); V. Abhishek, K. Jerath, and Z. Zhang, Agency Selling or Reselling? Channel Structures in Electronic Retailing, 62 Mgmt. Sci. 2259 (2016); L. Tian, A.J. Vakharia, Y. Tan, and Y. Xu, Marketplace, Reseller or Hybrid: Strategic Analysis of an Emerging E-commerce Model, 27 Prod. and Oper. Mgmt. 1595 (2018).

8. See generally supra note 7.

9. Id.

10. Id.

11. Id.

12. Id.; see also C. Nosko and S. Tadelis, The Limits of Reputation in Platform Markets: An Empirical Analysis and Field Experiment, The National Bureau of Economic Research ("NBER") Working Paper No. 20830 (2015), available at The authors explain, among other things, that buyers may draw conclusions about the quality of a platform from single transactions, causing a reputational externality across sellers. They document this problem using eBay data and claim that platforms can benefit from identifying and promoting higher quality sellers.

13. Id.

14. See A. Hagiu and J. Wright, On the optimality of ad valorem fees, Mgmt. Sci. (forthcoming 2020).

15. See X. Vives, Oligopoly Pricing: Old Ideas and New Tools, Ch. 6 (MIT Press 1999).

16. See P. Klemperer and J. Padilla, Do Firms’ Product Lines Include Too Many Varieties?, 28 RAND J. Econ. 472 (1997).

17. See J. Farrell and M. Katz, Innovation, Rent Extraction, and Integration in Systems Markets, 48 J. Indus. Econ. 413 (2000).

18. See Nosko and Tadelis, supra note 12.

19. Furthermore, and as highlighted in Section 2 of the 2016 joint paper by Autorité de la Concurrence and Bundeskartellamt, Competition Law and Data, in some cases, greater transparency can also facilitate entry by new competitors (in this context, additional third-party sellers joining the platform’s marketplace) that gain access to more information about consumer needs and market conditions.

20. See H.Y. Kang, Intra-platform Envelopment: The Competitive Dynamics Between the Platform Owner and Complementors, Acad. of Mgmt. Proceedings 11205 (2017).

21. This entry pattern is supported by several empirical studies. See, e.g., F. Zhu and Q. Liu, Competing with complementors: An empirical look at, 39 Strategic Mgmt. J. 2618 (2018); B. Jiang, K. Jerath, and K. Srinivasan, Firm strategies in the "mid tail" of platform-based retailing, 30 Mktg. Sci. 757 (2011); Hagiu and Wright, supra note 7.

22. See Klemperer and Padilla, supra note 16.

23. See A. Hagiu and D. Spulber, First-Party Content and Coordination in Two-Sided Markets, 59 Mgmt. Sci. 933 (2013). The authors explain that a platform may have the incentive to include first-party content alongside third-party content to mitigate the "chicken and egg" coordination problem in user participation.

24. See, e.g., T. Chaney, The Gravity Equation in International Trade: An Explanation, 126 J. Political Econ. 150 (2018).

25. A. Hagiu, B.Jullien, andJ. Wright, Creating Platforms by Hosting Rivals, Mgmt. Sci. (forthcoming 2020).

26. See Z. Chen and P. Rey, Loss Leading as An Exploitative Practice, 102 Am. Econ. Rev. 3462 (2012).

27. An "experience good" is a product or service where product characteristics, such as quality or price, are difficult to observe in advance, but these characteristics can be ascertained upon consumption. Experience goods include hairdressers, canned food, etc. A "credence good" instead is a good whose utility impact is difficult or impossible for the consumer to ascertain even after consumption. Examples of credence goods include legal services and economic consulting services.

28. See, e.g., B. Yoo, V. Choudhary, and T. Mukhopadhyay, Electronic B2B Marketplaces with Different Ownership Structures, 53 Mgmt. Sci. 952 (2007). The authors explain that biased marketplaces (i.e., marketplaces owned by sellers or buyers) may set prices that induce greater participation from both buyers and sellers and greater social welfare compared to neutral marketplaces. Also relevant is V. Nocke, Peitz, M., and K. Stahl, Platform Ownership, 5 J. Eur. Econ. Ass’n 1130 (2007), in which the authors demonstrate that vertical integration of sellers onto the marketplace is weakly welfare-increasing.

29. And even without supra-competitive rents, as entry is rarely immediate, competitors may have sufficient time to reap the rewards of their investment.

30. F. Zhu, Friends or foes? Examining platform owners’ entry into complementors’ spaces, 28 J. Econ. & Mgmt. Strategy 23 (2019).

31. See P. Belleflamme and E. Toulemonde, Negative Intra-group Externalities in Two-Sided Markets, 50 Int’l Econ. Rev. 245 (2009); P. Belleflamme and E. Toulemonde, Platform Competition and Sellers Investment Incentives, 54 Eur. Econ. Rev. 1059 (2010).

32. Zhu, supra note 30.

33. See Zhu and Liu, supra note 21.

34. See J. Foerderer, T. Kude, S. Mithas, and A. Heinzl, Does platform owner’s entry crowd out innovation? Evidence from Google photos, 29 Info. Sys. Research 444 (2018). Note, in addition, that none of the theoretical papers they cite seem to fill this gap in our opinion.

35. See J. Schumpeter, Capitalism, Socialism and Democracy (Harper & Brothers 1942).

36. See K. Arrow, Economic Welfare and the Allocation of Resources to Invention in: The Rate and Direction of Inventive Activity: Economic and Social Factors, National Bureau of Economic Research, Committee on Economic Growth of the Social Science Research Councils, at 609-26 (Princeton University Press 1962).

37. See C. Shapiro, Competition and Innovation: Did Arrow Hit the Bull’s Eye? in: The Rate and Direction of Inventive Activity Revisited, National Bureau of Economic Research, Inc., at 361 (2011).

38. See P. Aghion, R. Blundell, R. Griffith, P. Howitt, and S. Prantl, The effects of entry on incumbent innovation and productivity, 91 Rev. of Econ. and Statistics 20 (2009).

39. See P. Aghion, C. Harris, P. Howitt, and J. Vickers, Competition, Imitation and Growth with Step-by-Step Innovation, 68 Rev. of Econ. Studies 467 (2001).

40. See J. Foerderer, T. Kude, S. Mithas, and A. Heinzl, supra note 34.

41. See C. Cennamo, Y. Gu, and F. Zhu, Value co-creation and capture in platform markets: Evidence from a creative industry, 2018 Working Paper, Harvard Business School.

42. See Zhu and Liu, supra note 21.

43. N. Dryden, S. Khodjamirian, L. Rovegno, and I. Small, Another Look at the Impact of Amazon Retail’s Entry on Third-Party Innovation at Amazon’s Marketplace (2020) (on file with authors).

44. Zhu, supra note 30.

45. F. Zhu, When Tech Companies Compete on their Own Platforms, Harv. Bus. Rev. (June 2019).

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