Simple and Near-Optimal Mechanisms for Market Intermediation

Abstract

A prevalent market structure in the Internet economy consists of buyers and sellers connected by a platform (such as Amazon or eBay) that acts as an intermediary and keeps a share of the revenue of each transaction. While the optimal mechanism that maximizes the intermediary’s profit in such a setting may be quite complicated, the mechanisms observed in reality are generally much simpler, e.g., applying an affine function to the price of the transaction as the intermediary’s fee. [7, 8] initiated the study of such fee-setting mechanisms in two-sided markets, and we continue this investigation by addressing the question of when an affine fee schedule is approximately optimal for worst-case seller distribution. On one hand our work supplies non-trivial sufficient conditions on the buyer side (i.e. linearity of marginal revenue function, or MHR property of value and value minus cost distributions) under which an affine fee schedule can obtain a constant fraction of the intermediary’s optimal profit for all seller distributions. On the other hand we complement our result by showing that proper affine fee-setting mechanisms (e.g. those used in eBay and Amazon selling plans) are unable to extract a constant fraction of optimal profit in the worst-case seller distribution. As subsidiary results we also show there exists a constant gap between maximum surplus and maximum revenue under the aforementioned conditions. Most of the mechanisms that we propose are also prior-independent with respect to the seller, which signifies the practical implications of our result.