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Electronic B2B marketplaces with different ownership structures.

Article Excerpt
1. Introduction

Electronic marketplaces promise seamless connectivity across enterprises, aggregation of buyers and suppliers, increased supply chain visibility, and dramatic reductions in transactions costs. Despite the end of the hype surrounding online marketplaces, the hard work of developing the innovations, standards, and technologies to unleash the power of electronic trading continues apace. Standards bodies including OASIS, UN/CEFACT, and RosettaNet have developed standards for business-to-business (B2B) integration including ebXML and RosettaNet that enable trading partners to integrate their processes and allow disparate systems to communicate with each other. The volume of business is, by far, the highest for B2B marketplaces followed by B2C and C2C. The value of B2B electronic transactions was 12 times the volume of B2C transactions, reaching $2.37 trillion in 2004 (eMartketer 2003). Electronic marketplaces continue to evolve at a rapid pace with increasing consolidation and the emergence of private exchanges.

The development of electronic marketplaces has provided researchers with many opportunities for research and led to the emergence of new areas of study such as "two-sided markets," supply chain integration, and management of information flow across organizational boundaries. Yet there remain many unanswered questions. This paper focuses on the implications of the ownership structure of electronic marketplaces on the participants such as buyers and sellers who use the marketplace. We define three potential ownership structures: (1) buyer-owned marketplaces where some buyers jointly own the marketplace, (2) supplier-owned marketplaces, and (3) neutral marketplaces that are owned by independent third parties (neither buyers nor suppliers). We also refer to buyer- and supplier-owned marketplaces as biased marketplaces.

Our goal is to study the impact of the three types of ownership structure on electronic marketplaces. While all three types are found in B2B marketplaces, only a subset of them are found in business-to-consumer (B2C) or consumer-to-consumer (C2C) marketplaces (buyer-owned marketplaces are not found in B2C markets and only neutral marketplaces exist in C2C markets). For example, large successful C2C markets (eBay, Yahoo auctions) are typically owned by independent firms. Many B2C marketplaces are also owned by independent third-party firms (Ubid.com, Bidz.com). However, there is an additional possibility in B2C markets--that the seller firms can jointly own the electronic marketplace. In reality, due to the extreme diversity of products that consumers buy, the B2C space is dominated by online retailers that function as neutral intermediaries (WalMart.com, Amazon.com). Many manufacturers offer a direct online channel to consumers (Dell.com, sonystyle.com) and these may be considered a limiting case of a supplier-owned B2C marketplace. On the other hand, B2B marketplaces exhibit the full range of ownership structures with numerous neutral marketplaces (Freemarkets acquired by Ariba, Carrierpoint), buyer-owned marketplaces (Perfect Commerce, Worldwide Retail Exchange), and supplier-owned marketplaces (Exostar, Quadrem). Hence, we focus mostly on the implications of the ownership structure on B2B marketplaces but some of our results may also be applicable to other marketplaces.

The owners can exercise control over the marketplace by setting the policies and prices. The goal of the marketplace also changes as the ownership is held by a neutral intermediary or a group of buyers or sellers. Articles in the trade press have questioned the integrity of biased marketplaces (buyer or supplier owned) arguing that buyers (suppliers) may be at a disadvantage in a supplier-(buyer-) owned market. However, biased marketplaces may find it easier to gather critical mass and liquidity due to the owners' transactions. On the other hand, neutral marketplaces are often developed by existing intermediaries that want to take advantage of the new technology. Often these firms have deep expertise in information technology.

In this paper, we compare biased intermediaries to neutral intermediaries when the marketplace exhibits two-sided network effects. We present results from a general model of a marketplace and address several questions. Do prices charged by the marketplace from buyers and suppliers depend on the ownership structure? If yes, what kind of structure would buyers prefer and would it be different from the structure preferred by suppliers? Does the ownership structure impact the level of participation from buyers and suppliers? How is the surplus of buyers and suppliers affected by ownership and which structure is best from the viewpoint of maximizing social welfare? We find that prices, surplus, and participation levels do vary with ownership structure. Biased marketplaces provide greater surplus to buyers and suppliers compared to neutral marketplaces and biased marketplaces set prices to induce greater participation (demand) from both buyers and suppliers compared to a neutral marketplace.

This paper is organized as follows. Section 2 reviews prior literature related to electronic marketplaces. We develop our model in [section]3. We provide our results and a comparison of the three ownership structures in [section]4. The discussion and conclusions are presented in [section]5.

2. Literature Review

Bakos (1998) classifies the functions of marketplaces in to three categories: (1) matching, (2) aggregation functions, and (3) providing an institutional infrastructure such as legal and regulatory framework. Mahadevan (2003) provides a classification scheme for B2B marketplaces identifying 12 B2B market structures. Both researchers point out that the degree of buyer and supplier fragmentation affects the level of influence that buyers and suppliers can exert on a marketplace. Yoo et al. (2003) examine the impact of network effects, information service levels, and switching costs in the context of a neutral B2B exchange. Another classification scheme is provided by Kaplan and Sawhney (2000). They emphasize the aggregation role of marketplaces and, in particular, the cross-network effect where the addition of a buyer benefits only suppliers and the addition of a supplier benefits only the buyers. Brynjolfsson and Kemerer (1996) show that network externalities of spreadsheet software programs allow firms to charge a higher price for these programs. Wang and Seidmann (1995) show that the participation of more suppliers can generate positive externalities for the buyer and negative externalities for other suppliers in an electronic data interchange (EDI) network. In the context of EDI, Riggins et al. (1995) show how a buyer can attract suppliers to its EDI network in the presence of network effects and Barua and Lee (1997) show how to subsidize suppliers to attract them when an EDI system is introduced. Srinivasan et al. (1994) examine the impact of EDI on shipment performance and Mukhopadhyay et al. (1995) quantify the business value of EDI. Choudhury (1997) examines the appropriate form of EDI for various situations.

Bakos and Nault (1997) discuss the optimal structure of electronic networks using a cooperative game model. Lucking-Reiley and Spulber (2001) note the different ownership structure of marketplaces but comment that it is not clear whether any ownership structure will be more successful than others. They note that ownership tends to reside with the side that has the greatest concentration of market power and point out the regulatory issues raised by buyer-or supplier-owned marketplaces. Other research...

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