Online shopping is a global phenomenon, and digital marketplaces have emerged as e-commerce giants. While platforms like Amazon and Zalando appear to champion consumer welfare through low prices and endless choice, their underlying business model raises a critical question: Does the reality match the rhetoric?
These tech giants operate as 'hybrid marketplaces', selling their own products (private labels or other brands’ products) as a retailer while simultaneously hosting third-party competitors from whom they earn commissions. By controlling the platform while competing on it, they act— in the words of American politician Elizabeth Warren — "as both referee and player" in the digital marketplace, a dual role that policymakers worry is distorting fair competition.
Özlem Bedre Defolie, Professor holding a joint chair at the EUI Department of Economics and Robert Schuman Centre, coordinated the European Research Council-funded project DIPVAR (Digital platforms: pricing, variety, and quality provision). The project examined how the conduct of dominant digital platforms affects product prices, variety, competition, and consumer welfare.
How did the initial idea for DIPVAR originate, and what is the project’s main goal?
The idea took shape in 2018, inspired by the rising dominance of digital platforms and their market valuations. At the time, policymakers had begun to be concerned about the anti-competitive effects of dominant digital platforms, but there was a lack of what antitrust experts call a 'theory of harm'—a concrete framework to explain exactly how a dominant platform's certain practices might harm competition and consumers.
DIPVAR’s first project focuses on understanding the business practices of hybrid digital marketplaces and their implications for independent businesses (third-party sellers) and everyday consumers. The project analysed the key trade-offs platforms face when setting prices, and how their decisions affect product variety. Ultimately, the goal was to provide a solid theoretical framework to assist policymakers in crafting more effective antitrust policies and regulations—a critical issue in Europe, the US, and beyond—as dominant digital platforms continue to gain unprecedented market power.
What is a 'hybrid platform', and how does your research model the way hybrid platforms like Amazon operate?
The hybrid model differs fundamentally from a “pure marketplace”—such as eBay—where the platform does not act as a retailer, but serves exclusively as a marketplace enabling trade between third-party sellers and consumers.
In a hybrid model, the platform sets the rules of trade while directly competing against third-party sellers as a retailer. Our work addressed a fundamental question for policymakers: Is the hybrid model fair to competitors, and ultimately beneficial to consumers? While it may initially seem that this dual setup leads to lower prices, our analysis reveals a far more complex and troubling picture.
In the DIPVAR project, we built a realistic and tractable model of how these hybrid platforms work, based on a crucial reality: the massive power imbalance between the dominant platform and its independent sellers. While the tech giant sells a vast range of products and has enough clout to influence market prices, individual third-party sellers have tiny market shares and almost no effect on the market prices.
In our model, the hybrid platform first decides whether to introduce its own products into the marketplace. If it does, it simultaneously sets the prices of its own products and the commission rate for third-party sellers. These independent businesses must then decide whether to join the marketplace. If they do, they find themselves competing not only among themselves but also against the very giant that sets the rules of the game.
Could you walk us through a real example? What did your analysis reveal about the impact of the hybrid model on competition and consumers?
To illustrate how this works, let’s consider Amazon. It has become the dominant marketplace platform worldwide, accounting for roughly 35% of the digital market share in the EU and 40% in the UK. In the US, the figure is slightly lower due to competition from Walmart, but in Europe, no other marketplace can truly challenge Amazon.
Imagine searching for a backpack on Amazon. You will find Amazon’s own branded products listed alongside established brands, like Eastpak, which can also be sold by Amazon as a retailer and by other independent sellers, as well as many other small brands sold by their producers or other retailers. Our analysis highlights two critical dynamics:
First, because Amazon does not charge itself a commission, it can offer its own products or branded products that it sells as a retailer at lower prices. Second, Amazon has an incentive to raise rivals’ costs by increasing the fees charged to third-party sellers.
On average, Amazon takes a 15% commission fee on every third-party sale (meaning if you buy a €100 item from an independent company, €15 goes to Amazon). On top of that, it charges fulfilment fees for storage, packaging, and delivery. Collectively, all these fees make competitors' goods more expensive, shifting customer demand toward products sold by Amazon as a retailer.
Our research concludes that this leads to a mechanism we call 'insidious steering'. By raising rivals’ operating costs and charging high commissions, the platform subtly drives up third-party product prices, making its own branded goods look much more attractive and affordable by comparison. Ultimately, consumer prices rise as sellers pass these high fees along to buyers. Furthermore, product variety decreases substantially as profitability declines due to high fees; fewer third-party sellers can afford to remain on the platform.
While digital platforms successfully reduce search and transaction costs, our research shows that their immense power ultimately limits product variety and leads to higher prices for consumers due to the hybrid model.
Based on your research findings, what actionable recommendations would you give to policymakers aiming to regulate dominant digital platforms? Is the EU moving in this direction?
DIPVAR provides a scientific foundation for antitrust policies, offering an alternative to solutions adopted by some states.
For instance, India has banned the hybrid model entirely, forcing Amazon’s B2B business to operate solely as a pure marketplace. Amazon then turned itself into a pure retailer by banning third-party businesses from its marketplace. Our research suggests that this can happen when Amazon-owned products are of sufficiently high quality or low cost, compared to third-party products. In this case, a ban on the hybrid model ultimately harms consumers by limiting product variety.
Conversely, France has proposed general e-commerce taxes on all transactions across digital marketplaces. This solution can even backfire. Imposing taxes on marketplace transactions of third-party sellers encourages platforms to favour their own products even more by raising rivals’ fees to maintain profit margins, making third-party goods even less competitive.
Our research suggests an alternative way to correct the distortions of the hybrid model: targeted taxation. This involves taxing a dominant platform’s revenues only when it acts as a reseller, thereby reducing the platform’s incentives to unfairly promote its own goods.
Currently, in Europe, the EU Digital Markets Act (DMA) bans 'direct self-preferencing', such as giving priority ranking to a platform’s own products. An example is the Amazon 'Buy Box' —the prominent 'Add to Cart' feature that often showcases Amazon-branded items or brands that Amazon sells as a retailer. While banning self-preferencing is a vital step, our project's results warn that it is not enough.
DIPVAR, as I explained earlier, has revealed an 'insidious steering' mechanism through fee adjustments. By raising fees on rivals' products, a platform can indirectly raise competitors' prices, giving Amazon-sold products a price advantage. This form of manipulation is much harder to detect and regulate than simple ranking priority.
In conclusion, while digital marketplaces significantly reduce search and transaction costs, we must ensure their power does not kill trade, reduce variety, or harm third-party sellers. Ultimately, the power of major marketplace platforms doesn't just affect consumers—it also accelerates the closure of small physical shops as more customers shop online, reshaping our entire retail landscape.
Özlem Bedre Defolie is a full-time Professor and a Joint Chair at the EUI Department of Economics and at the EUI’s Robert Schuman Centre for Advanced Studies. Her research areas are applied microeconomic theory and industrial organisation, with a focus on antitrust and regulation questions related to the economics of multi-sided platforms, digital markets, multiproduct firms, and vertical contracts.
Professor Bedre Defolie was the coordinator of the international research project DIPVAR, which has received funding from the European Research Council (ERC) under the European Union's Horizon 2020 research and innovation programme (grant agreement No 853123).
Read the paper Anderson, S. and Bedre-Defolie, Ö. (2024). Hybrid platform model: Monopolistic competition and a dominant firm. The RAND Journal of Economics, 55(4):684–718.