Traditionally, online retailers have acted as product resellers. Recently, these retailers have also started to serve as online marketplaces by providing a platform to directly connect sellers with buyers. Over and above re‐shaping the traditional e‐commerce market, conventional wisdom suggests that this new format will mitigate the double‐marginalization effect and benefit both the intermediary and suppliers through a revenue sharing scheme. However, we find that upstream competition between suppliers critically moderates this possibility. We also find that the interaction of order‐fulfillment costs and upstream competition intensity moderates the selection of an optimal mode for the intermediary. More specifically, when order‐fulfillment costs are large and when the supplier product offerings are similar (i.e., competition intensity is high), the pure reseller mode is the preferred choice; when order‐fulfillment costs are small and the supplier product offerings are highly differentiated (i.e., low competition intensity), the pure marketplace mode is the preferred choice. Finally, the hybrid mode is preferred when order‐fulfillment costs are moderate and suppliers’ products are somewhat similar (i.e., competition intensity is moderate). The intuition behind these results hinges on the trade‐off between transfer of pricing rights and the responsibility for order fulfillment. Our findings not only complement the emerging online marketplace literature but also provide testable empirical questions concerning the relationship and magnitude of different factors steering the mode choice.