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.
