Revenue Maximization in Customer-to-Customer Markets

Abstract

Customer-to-customer (C2C) markets, such as eBay, provide a platform allowing customers to engage in business with each other. The success of a C2C market requires an appropriate pricing (i.e., transaction fee charged by the market owner) scheme that can maximize the market owner’s revenue while encouraging customers to participate in the market. However, the choice of an optimal revenue-maximizing transaction fee is challenged by the large population of self-interested customers (i.e., sellers and buyers). In this paper, we address the problem of maximizing the market owner’s revenue based on a hierarchical decision framework that captures the rationality of both sellers and buyers. First, we use a model with a representative buyer to determine the sales of products in the market. Then, by modeling sellers as self-interested agents making independent selling decisions, we show that for any transaction fee charged by the market owner, there always exists a unique equilibrium in the selling decision stage. Finally, we derive the optimal transaction fee that maximizes the market owner’s revenue. We find that to maximize its revenue under certain circumstances, the market owner may even share its advertising revenues with sellers as rewards to encourage them to sell products in the market and bring more website traffic. Our results indicate that the market owner’s revenue can be significantly increased by optimally choosing the transaction fee, even though sellers and buyers make self-interested and rational decisions.