UPSC Prelims 2026 Q87: E-commerce Revenue Models — Explained
An e-commerce revenue model where the seller has control over pricing but doesn't keep products in stock and instead transfers customer orders and shipment details to a third-party supplier, who then ships the goods directly to the customer, is called:
- Dropshipping Model
- Affiliate Revenue Model
- Transaction Fee Revenue Model
- Agency Revenue Model
Answer: (a) Dropshipping Model
Statement-wise explanation
- a: correct — In dropshipping, the online seller lists products and sets the retail price but holds no inventory. When a customer orders, the seller passes the order and shipping details to a third-party supplier, who ships the goods straight to the customer. The seller keeps the difference between its retail price and the supplier's wholesale price. Britannica describes the dropshipper as a vendor who holds no stock and acts as the go-between for buyers and a third-party supplier. This matches every part of the description in the question.
- b: incorrect — In the affiliate model, a website or influencer sends traffic to another merchant's site. It earns a commission for each click, lead or sale. The affiliate does not set the price and does not take or pass on the customer's order. The merchant does both. The question says the seller controls pricing and handles the order, so this model does not fit.
- c: incorrect — In the transaction fee model, a platform earns a fee or a cut of each transaction it enables. Payment gateways, online brokers and marketplaces that charge sellers a commission all work this way. The platform is only a go-between. It neither sets the product's price nor takes charge of the customer's order as the seller. That makes it the wrong fit.
- d: incorrect — In the agency model, the supplier or principal sets the retail price. The retailer sells on its behalf as an 'agent' and keeps a commission. The best-known case is e-book pricing, where publishers set the price and retailers kept about 30% of the list price. Pricing control is the reverse of what the question describes, where the seller controls the price.
How to eliminate
Two clues settle this question: who sets the price, and who holds the stock. The seller controls pricing, so rule out the agency model, where the principal or supplier fixes the price. Also rule out the affiliate model, where the affiliate only refers buyers and never sets prices. The seller also takes the customer's order and forwards it as the seller, not as a fee-charging go-between. That rules out the transaction fee model. What is left is a seller who sets prices but has no warehouse, while a supplier ships directly to the customer. The word 'drop-ship' itself means shipping straight from the supplier to the buyer. To be sure, you need to know the basic definitions of these four models. Remember this one: dropshipping means the seller controls the price but holds no inventory, and the supplier ships direct.
Know more
E-commerce revenue models describe how an online business earns money. They differ on three questions: who holds the stock, who sets the price, and what the business keeps.
| Model | Holds inventory? | Sets price? | Earns from |
|---|---|---|---|
| Dropshipping | No (supplier does) | Seller | Retail price minus supplier's price |
| Inventory / retail | Yes | Seller | Retail margin |
| Affiliate | No | Merchant | Commission per click/lead/sale |
| Transaction fee | No | Sellers on platform | Fee per transaction |
| Agency | No | Principal/supplier | Agreed commission |
| Subscription | Varies | Business | Recurring fee |
| Advertising | No | - | Ad space sold to advertisers |
Dropshipping in brief. It needs little starting capital and no warehouse, so small online sellers find it easy to start. The weak points are thin margins, little control over quality and delivery time, and dependence on the supplier.
The Indian policy angle. India's FDI policy sorts e-commerce into two models:
- Inventory-based model: the e-commerce entity owns the goods and sells them directly to consumers. FDI is not permitted.
- Marketplace model: the entity provides an IT platform that acts as a facilitator between buyers and sellers. 100% FDI is allowed under the automatic route. A marketplace may not own or control the inventory sold on it. A vendor's inventory is deemed controlled by the marketplace if more than 25% of the vendor's purchases come from the marketplace or its group companies (Press Note 2 of 2018).
Dropshipping fits neither model neatly. The seller sets prices like a retailer but holds no inventory, like a marketplace. That is why UPSC tests models by their features, not just their names.
NCERT Concepts to Revise
- Platform economy: The options are ways a platform or online seller can earn, so knowing how platforms match buyers and sellers helps tell them apart.
- Digital economy: All four options are revenue models within the digital economy, the wider field this question comes from.