Electronic Marketplaces, participation considerations

When it comes to play or not play in electronic marketplaces a good majority of economic agents are still debating the issue. The question about participating or creating an electronic marketplace is pondered by producers and intermediaries alike. Most of the manufacturers, retailers, wholesalers, distributors etc. already have some semblance of online store that act as multisided electronic marketplace with myriad of participants on demand and supply side. The question is whether to become a supply side partner in an established marketplace if it serves the intended consumer of articles offered or own an electronic marketplace connecting demand and supply sides; in the name of finding new avenues of growth or improving transactional efficiencies. The overarching reasons for such a debate stem from eyeing the platforms with increasing share of demand side and the potential network benefits of building a demand or supply side aggregations using digital competencies. A detailed understanding of electronic marketplaces is needed to make such decisions.

Electronic Marketplaces (EMPs)?

The classification of electronic marketplaces is a complex endeavor even if it is sifting through the available literature and collating attributes. In most basic terms electronic marketplace can be defined as an online platform that connects participants from demand and supply side and facilitates transactions digitally. On a more technical note, electronic marketplaces can be viewed from perspective of different dimensions, such as the number of participants, ownership structures, market mechanisms, relations, articles offered etc. In the interest of this writing, classification based on co-ordination of economic activities through aggregation, collaboration, auction and exchange, are curious paths to explore. The other two dimensions that are related to the topic here are the number of participants from many to many, one to many, or few to few, and lastly the market or hierarchical orientations. Since this is not a conversation on economics, it is practical to assume that EMP is a business oriented digital marketplace which combines concept of governance and process optimization. Amazon business for example, can be considered a hybrid agent, focused not only on governance of transactions by reducing the search and pricing costs, but also on creating hierarchical optimization of related processes from relationship management to streamlining procurement workflows. I would think that most multi sided EMPs have similar designs or are moving towards it. 

Commonly EMPs are termed as, e-hubs, exchanges, portals, auction houses, pricing engines, extranets, comparison engines, meeting places, collaborative platforms, e-stores etc. The proprietor ship can be neutral owners to competitive owners. The definitions, to a degree follow a narrow or broad needs of transacting parties and their industries with varying number of participants in either side of the platform. As a governance mechanism EMPs reduce the coordination and search costs while connecting sellers to buyers in an efficient manner as compared to searching and communicating through other medium. An argument can be made that the efficiency and ease of transacting through an EMP can be achieved with other medium if a relational context with trust in few key suppliers is paired with expertise on specific assets and their application. In that case the broader online marketplace becomes the means of lowering discovery and search costs where the buyer in few clicks can find the competitive metrics and still choose the trusted partner. As the risk associated with a transaction increases the EMPs pose an adverse selection argument. To that, the technology has come a long way in a short time with connected systems and specialized platforms covering every business process. The enhanced content forms show cased through sophisticated presentation layers are bringing senses closer to acceptable validation. Couple this with the inherent transparency of internet, the adverse selection costs will continue to decline albeit at a different pace for different assets.

Why the question?

If EMPs improve transaction efficiencies and provide a critical mass to demand side, why the hesitation by any supply side participant to join a thriving demand side EMP? The contemplations are not without merit. The most prevalent concern is the cost of disruption to status quo. The core tenets of that fear are destabilizing an existing eco system, the value based hierarchy which is exhibited in discounts on either side of the platform, the competitive pressures resulting from EMP (competitive) owners’ participation on top of other partakers, and the loss of customer intimacy which, although, high in transaction costs, is still a valued asset for intermediaries and producers alike. The threat of replacing high cost, high value relation with, an impersonal and transactional in nature, digital intermediary, can undoubtedly have some, long term consequences and business model implications. The discussion is exasperated by the evident aim of EMPs to provide more substitutes and product liquidity, (which is understandable since demand side participation is partly fueled by competition driven choice and price). Whether one enters perfect or pseudo perfect competition the end result is the same. The marginal cost is the eventual expectation of return for participants in the long run and once you enter the marketplace the pricing strategies from backward induction point to same result for survivors; profits slightly above marginal costs or at marginal cost. Unless a single participant offers endless products on an EMP it will eventually exit as the price game at each single product level will become an attrition war, and the profitability thresholds are breached one by one.  

The proprietor of the ecommerce marketplace such as Amazon, Walmart etc. strongly mediate their eco systems and mandate certain conformity, a necessity in their eyes for building and maintaining a critical mass demand side. These established EMPs essentially absorb the transaction governance costs that would been transferred to participants transacting in other mediums, yet they come with low to zero onboarding costs for supply side partners while offering a well-established demand side. It takes considerable resources even with skilled partners to launch an EMP and create a desirable demand side to attract supply side partners. The resources needed to handle the complexity of creating an EMP and the critical mass of demand side needs to be balanced with any realized and perceived efficiencies. 

The importance of access to information and the ability to unveil opportunities through information, cannot be ignored. The current technological advancements undoubtedly provide different means of exploiting slightest of information edge than ever before. Although the EMP proprietor may give all participants access to, some competitive information, not all is given or can be given hence creating an information asymmetry that is not the hallmark of physical marketplace. In physical marketplace, players have similar uncertainties and information asymmetries, and each player according to his understanding of the market and its value chain may have a leg up through specific information. Competitive EMPs differ from physical marketplaces in this regard. In EMPs the requirements of property ownership and the cost of participation are lower. In an EMP the information unbalance favors not only the consumer but also the marketplace owner specially if owner is also a participant. The free flow and lower acquisition costs of information, shift the market power to the marketplace proprietor and consumers.

The producers creating a hierarchical marketplace for suppliers have the potential benefit of consolidation and supply chain resilience but that can come at the cost of buying power if the marketplace is many to one. On the flip side the entry by producers to EMPs as supplier even with limited assortment may be perceived by existing intermediaries as a less risky foray by producers to eventually replacing traditional intermediaries.

Produces considering third party EMPs also need to think about substitutes. This is not a new market phenomenon, but the EMPs drastically reduces the search costs and with the improvements in machine intelligence the EMPs can offer fast and accurate substitutes, all of which further the opportunistic behavior. Even if the brand name is a synonym for the article and its application, EMPs can speed the erosion of brand connection to an application due to availability of easy substitutes therefore increasing producer’s risk. 

Conclusion

Core value proposition of the multisided marketplace owner is the facilitation of the matchmaking between participants from demand and supply side and the enabling of transactions at lower costs. Whether one is connecting a certain demand side to a specific supply side or just making strides from reselling intermediary to a multisided platform ownership, the key question is understanding the value creation. Success factors include critical mass, collaboration support and measuring critical mass by the number of participants or transaction volume per participant while balancing channel disruption, brand dilution, and competing as a substitute, or with the substitutes. Whether you draw influence diagrams, resort to payoff matrix or look at indifference curves for the target audiences there is enough fun in the decision-making process. It is a matter of understanding participants; the true nature of demand and supply side and what exchange is being optimized that will fuel network effect.