Adding sellers to online marketplaces can backfire

Competition among sellers is widely seen as good for online marketplaces — and more competition is even better. At least that’s what conventional wisdom suggests.

But a new study by researchers at UNC Kenan-Flagler Business School suggests otherwise.

Operations Professors Nur Sunar and Jayashankar Swaminathan and doctoral student Rahul Roy (PhD ’26) looked at what happens when online marketplaces get “thicker,” meaning they have more providers vying for the same customers.

Using data from a leading online U.S. solar marketplace, where installers bid on homeowner projects, they found that more providers increase transactions up to a point. Beyond that, having too many actually hurts sales.

“Economic theory holds that more competition — and therefore more choice — drives innovation and benefits consumers,” says Sunar. “But what we find is that marketplace operators can’t keep adding more providers and expect sales to climb indefinitely. There’s a sweet spot where customers have enough choice without creating so much competition that providers give up.”

This is the first empirical study to show that having too many providers in a marketplace can backfire. The findings have implications for companies that operate online service marketplaces, particularly those where providers compete for jobs rather than passively list their services.

The challenge of competing for jobs

Most e-commerce sites operate like digital storefronts, with products sitting on virtual shelves for customers to browse and buy — think Amazon and Wayfair. But a growing category of platforms operates more like auction houses, where service providers compete by bidding for customer projects. Platforms like HomeAdvisor and Angie’s List are examples of this model.

The U.S. service sector, which represents roughly three-quarters of GDP, increasingly runs on platforms like these for everything from knowledge work to home upgrades to renewable energy projects.

Sunar’s study focused on an online U.S. solar marketplace operating in 33 states with more than 400 registered installers.

She was drawn to study this sector because of her interest in renewable energy. A central theme of her research focuses on applying management science as a tool for positive social impact.

“My colleagues and I are motivated to help position these platforms for growth,” she says. “By analyzing their data and understanding how they work best, we can help them optimize transactions. The goal is supporting the green transition, because when they succeed, it’s good for customers, good for manufacturers and good for the planet.”

In these marketplaces, the number of successful matches between customers and providers is a key performance measure: more matches generally signal better business performance. And indeed, the researchers found that as the number of providers increases, the number of transactions rises — at least at first.

But that changes as competition intensifies. Service providers must attract and ultimately win customers through a costly bidding process. “This process is time-consuming and expensive, especially when providers must visit customers’ homes just to compete for the job,” she says.

As a result, providers weigh their odds. “If there are too many providers in the marketplace, some decide it’s not worth their time to bid because their odds of winning are too low, and so they don’t bother,” she explains. “This is when we see a sharp decline in transactions.”

Sunar and her colleagues also found that when a few big providers dominate the market while many smaller players compete for scraps, overall transactions suffer. The imbalance gets worse in crowded markets, creating a double whammy that slows activity even more.

Finding that sweet spot that maximizes transactions

The takeaway from the research is clear: Limiting the number of providers can boost business. The key, according to Sunar, is finding that sweet spot where customers have sufficient choice and providers still believe they have a fair shot of winning contracts, so they stay engaged and keep bidding.

Marketplace operators need to be strategic about how many providers they allow and how diverse those providers are, she adds. One solution is dynamic information sharing, meaning platforms choose which providers get notified about new jobs. For example, instead of alerting all 20 installers in a zip code when a customer requests a quote, the platform could share that opportunity with just, seven installers, so more providers will submit bids.

“My advice to marketplace operators is: Yes, add more providers, but don’t flood the market,” she says. “There’s such a thing as too much choice.”

The researchers’ findings have broad applications across service platforms, and for renewable energy companies specifically, this research could drive meaningful change. The sector often involves costly, complex projects where contractors must invest significant time and resources just to compete for jobs.

“When renewable energy platforms use these insights to manage how many providers they work with, they can increase deals and get more clean energy projects moving,” she says.