A Model of Online Trading Platforms: Provisioning Trust for Transactions versus Enabling Discoveries

eBay, a leading C2C online platform in the US, charges a commission when users complete transactions on its platform. However, Taobao, a leading C2C platform in China conducts an ad-auction like mechanism to charge sellers for listing their information in response to buyers’ searches, that is, Taobao charges a fee so that buyers can discover the sellers. In this paper, we investigate when an online platform chooses to charge for discoveries as opposed to transactions. For this, we develop a game theoretic model and analyze it. Our analysis demonstrates that factors, such as trust, play a crucial role in determining the platform’s choice. Specifically, when users on the platform are more sensitive to the price as opposed to the trust, the online platform chooses to charge for discoveries. More surprisingly, when the platform charges for discoveries, we find that the platform may not have an incentive to list the sellers as desired by the buyers and sellers. However, we do not find this perverse behavior by the online platform when it charges for transactions. Consequently, with charging for discoveries, the social welfare may decrease.