The umpire can’t also own the team
Last year, business-to-consumer (B2C) e-commerce raised $374 billion in the US alone, corresponding to 10 percent of its total retail revenue (Statista). Amazon emerged as the dominant e-commerce platform in Europe and the US, generating 47 percent of the US e-commerce revenue, 30 percent of the UK e-commerce revenue, and 34 percent of e-commerce revenue in Germany (Statista). Amazon operates as a “hybrid platform,” that is, both as a marketplace connecting buyers and sellers, and as a retailer/reseller of its own products: either private label products, like Amazon Basics, or branded products. A large share of Amazon’s sales volume comes from its marketplace – in 2019, 53 percent of paid units were sold by third-party sellers (Amazon Q3 2020 Press Release, page 15). Several other big platforms have adopted a hybrid business model. For example, Apple App Store and Google Play sell their own applications, like Apple Music and Apple TV+ or Google Search, Maps, and Analytics, while enabling third-party application developers to interact with buyers on the same platforms.
The hybrid business model of dominant (“gatekeeper”) platforms has raised significant regulatory concerns in the last couple of years.[i], [ii] The central issue for regulators is whether they should be allowed to continue operating in a hybrid mode, if at the expense of great distortions in the market that undermine competition policy goals and consumer welfare.
Regulatory investigation and intervention
The European Commission (EC) is currently investigating whether Amazon’s practices violate the antitrust treaty that prohibits the abuse of a dominant market position. Two key concerns are whether Amazon limits access of third-party products to its consumer base and whether Amazon favors its own products at the disadvantage of third-party products by, for example, making their own products more prominent and thus steering consumers from third-party products to their own. [iii] The EC is also investigating Apple’s App Store following a complaint by Spotify against Apple’s rules.[iv] In the US, there is an ongoing antitrust investigation of Amazon, Google Android’s Google Play, and Apple iOS App Store rules. [v] US Senator Elizabeth Warren, well known for her position on breaking up American tech, stated about the hybrid platform model, “You can run the platform. That is, you can be the umpire in the baseball game. Or you can be a player. That is, you can run a business or you can have a team in the game. But you don’t get to be the umpire and have a team in the game.” [vi]
Another ongoing debate is about whether and how governments should tax the revenues of dominant digital platforms. In August 2019, French government introduced a 3 percent tax over Amazon marketplace revenues from purchases placed via its French website. Amazon quickly responded to the French tax by raising the fee that it collects from third-party product sales on Amazon.fr.[vii] ,[viii]
A model for analysis
Digital Platforms: Pricing, Variety, and Quality Provision (DIPVAR) is a five-year research project here at ESMT Berlin. One of our latest DIPVAR articles, “Hybrid Platform Model” (Simon Anderson, Özlem Bedre-Defolie), provides a canonical and tractable model of an e-commerce platform like Amazon.
The model captures the important and distinct features of an e-commerce platform market, focusing on one product category where many third-party products compete against the platform’s own product. First, the platform sets the percentage fee to be collected from third-party product seller revenues and decides whether to sell its own product alongside third-party products. Second, third-party product sellers decide whether to join the platform, after observing the platform’s fee and its product’s price. Once decided, they set their product price. The model also captures the fact that many third-party sellers are very small, so their individual pricing decisions cannot affect the market equilibrium. (According to the US House Report, 37 percent of third-party sellers solely rely on Amazon for access to consumers.) However, the platform’s product owns a large share, so the platform’s pricing of it affects the market equilibrium.
Impacts on product variety, pricing for consumers
Using this framework, our analysis delivers important implications for antitrust policy, regulation, and taxation of dominant hybrid platforms. The analysis shows that banning the hybrid platform business model benefits consumers, because it increases variety (the number of third-party products) and lowers seller fees and, consequently, prices on the platform. The analysis also illustrates how an improvement in the quality of the hybrid platform’s product or the reduction of its cost raises the platform’s equilibrium fee for third-party products, thus lowering consumer welfare. This finding is in surprising contrast to a common finding in industrial economics: a firm selling a higher-quality or a lower-cost product is good for consumers. This does not hold true for a hybrid platform, which makes revenues from sales of its own product and from fees collected from third-party product sales. When the platform has a better product (arising from a higher quality or a lower cost), the platform generates more sales from its own product relative to the sales of third-party products. This gives the platform incentives to raise the fee for third-party products, which leads to fewer third-party products joining the platform and, ultimately, less variety for consumers. In this way, the reduced variety due to fewer third-party products neutralizes the benefit the consumers have from the platform product’s improvement in quality or the reduction of its cost. The higher fee to third-party sellers leads to higher prices, lowering consumer surplus. The analysis also predicts a higher market share for the platform’s own product when either its quality improves or its cost is reduced, and thus a positive correspondence between the platform product’s market share and its fee on third-party sales. Regarding steering concerns, we find that the hybrid platform has incentives to favor its own product at the disadvantage of third-party products if the platform product has a sufficiently high quality or a sufficiently low cost.
Our analysis also examined the tax policy implications of the e-commerce platform framework. We conclude that a percentage tax of third-party sales on a platform operating as a pure marketplace is unlikely to affect seller fees. However, a percentage tax of third-party sales on a hybrid platform leads to higher seller fees and consequently to lower consumer surplus. Hence, the tax levied on Amazon’s marketplace revenues in France will likely harm French consumers by raising prices of third-party products sold on Amazon.fr. On the other hand, this implies that taxing the hybrid platform’s own product sales leads to an increase in consumer surplus, since this leads to lower third-party seller fees, lower prices, and more product variety on the platform.
Access the working paper of Anderson and Bedre-Defolie’s research here.
The DIPVAR project has received funding from the European Research Council (ERC) under the European Union’s Horizon 2020 research and innovation program under grant agreement No 853123.
[iii] Antitrust: Commission sends Statement of Objections to Amazon for the use of non-public independent seller data and opens second investigation into its e-commerce business practices. 2020. European Commission, November 10, 2020.