Supply Prioritization in Hybrid Marketplaces

We study how a profit-maximizing firm prioritizes its supply in a “hybrid marketplace” composed of both private and flexible supply agents. The firm can choose how many private agents to operate and pays them regardless of their work. Flexible agents, on the other hand, make their own revenue, pay a commission rate to the firm, and enter or exit the marketplace in equilibrium. We develop a general framework for supply prioritization that encompasses a wide range of applications—including any firm operating with a mix of employees (private agents) and contractors (flexible agents)—and allow for any complex pricing/matching/supply management policies. We analyze the implications of supply prioritization not through the specifics of a given policy but, instead, through the outcomes it implies for all stakeholders.Our main results show that without the use of supply prioritization, it is never optimal for the firm to use hybrid supply. On the other hand, prioritization strategies can make it optimal for the firm to operate a hybrid marketplace, even if the private supply is costly. Prioritizing private supply makes private agents particularly productive—justifying the firm’s investment—but comes at the expense of flexible supply that may flee the market. Hence, the firm prioritizes private supply when the market is “over-supplied,” but it may also prioritize flexible supply in “under-supplied” markets in which a slight increase of supply can have a significant impact. Our results provide a general understanding of the advantages of hybrid marketplaces and the key role of supply prioritization