Online Marketplaces - What’s Next?

The Birth of Marketplaces

Back in the depths of time, someone figured out that if you organised a group of people to come together at a specific time and place to exchange goods and services, this was much more efficient than lots of individual face-to-face transactions. The advent of money as a medium of exchange smoothed this process further.

The next step was for someone to appoint themselves as a regulator of market activity (usually connected to facilitating collecting a fee for themselves and a tax to the crown - the invention of money as a store of value and medium of exchange made this much easier!), in return for which they ensured the integrity of the market for all participants.

Key common features of these early marketplaces were:

• A common place and time to conduct transactions

• Sellers

• Buyers

• A set of standards on how transactions will be conducted

• Trust in those standards

• A regulator of some sort

• A record of transactions (a ledger - usually connected to a tax collection initiative)

  
  

Later, marketplace innovation sometimes included a ‘market maker’ who would act as the middleman between sellers and buyers. This lessened the requirements for a common assembly of all participants and could also allow transactions to occur remotely from participants.

These basic features have remained pretty much unchanged for thousands of years.

The Evolution of Marketplaces

Imagine you are a fisherman 300 years ago who has just made a good catch; you could return to your home village to sell your fish, or you could go to one or two other villages a few hours sail away. The only information available to you is the price that was paid in your village yesterday and maybe the price when you visited the other village five days ago. What do you do?

Now imagine it’s the present day; you pull out your mobile phone, ring up your contacts in each village, and ask for the spot price of fish; you then check your radar and observe that three other fishing boats are heading for your home port and they are riding low in the water, which means they have made a good catch, meaning local fish prices are probably about to dip due to the influx of supply. You then have enough information to decide that it will probably be worth your while to detour the extra two hours to the fish market further away in the other village.

Note the raw mechanics of how the market operates in these two scenarios have not changed; what has changed is the near-instantaneous availability of information that is relevant to price discovery by the market and the low relative cost of acquiring that information relative to the commodity in question.

So, What Happened as Connectivity Expanded?

Existing codified marketplaces like fish, meat, and grain have been going ‘online’ for the past three decades or more and now operate usually in a hybrid physical/online manner. Lower transaction costs, better price discovery, and better market access have fuelled growth and lowered costs.

However, the real story is that the rise of almost ubiquitous real-time connectivity and the plummeting cost of acquiring and storing information has allowed new, purely online marketplaces to spring up where there was no physical marketplace before. A good example in the UK was Rated People, which created a marketplace for consumers and tradesmen to meet virtually and arrange for home improvement and repair work to be done in the physical world. Other well-known examples include AirBnB, Ebay, SkyScanner, and Expedia.

The one crucial thing that all these online marketplaces had to build to succeed is trust. If a buyer and seller are physically meeting and contracting directly, it’s relatively easy for a marketplace owner to fall back on ‘Caveat Emptor’. If, however, they never actually meet and are contracting through a platform and tools provided by the marketplace provider, buyers expect a certain standard to be maintained. This drives operational marketplace costs in a way that favours larger operators as they can better ‘smear’ out the fixed costs of creating the standards in the first place and then drive down the per-transaction operating costs.

We can see how this has played out in marketplace consolidation, which, due to the operational scaling efficiencies, means there is usually only one, or occasionally two players, dominating their particular space. This has meant there are inevitably one (or two) private or for-profit entities wielding huge power over that particular marketplace. Other regulators, with bigger sticks, have taken note.

What Happens Next? — Evolution or Revolution?

Observers will have noted with interest how Bitcoin, in particular, has popularised the idea of a decentralised exchange mechanism, with no one authority having control over the record of transactions (the ledger) and a set of standards that are incommutable. How will this liberal decentralisation movement impact online marketplaces, particularly those that deal with non-physical items? Is there a new ‘third wave’ of marketplaces to come that are more technocratic and inflexible by design? Will non-physical marketplaces come to dominate? Will non-human market participants become more important?

There is one common thread in the history of marketplaces. Trust.

Any innovation looking to enhance or displace the current status quo has to address the issue of trust head-on; recent history has shown that this is a problem yet to be sufficiently addressed.