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How Market Design Can Impact Upon Electronic Marketplace Performance.

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“Discuss how market design can impact upon electronic marketplace performance. Use empirical examples to illustrate and support your answer.”
Marketplace performance can be defined as “how efficient a marketplace is in performing its tasks and meeting its objectives, while continuing to innovate, grow and expand”. From the work of O’Reilly and Finnegan, two types of factors were identified which impact upon electronic marketplace performance. These are strategic and contextual factors.
From current literature, the researchers identified that three strategic factors impact upon performance: market process design, IT and ownership. Market process design relates to how a market offers its products, IT refers to the IT products being offered, and ownership refers to the controller of the marketplace and the parties who utilise it.
O’Reilly and Finnegan found no evidence to suggest IT directly affects performance. However, they found the other two factors to be evident in strategic factors which affect performance.
Market Process Design
Bias
Bias had a noticeable impact on performance in markets that operated in indirect goods. This is evident in BTTransact, IBX and Proceedo where all markets favoured the buyer and experienced a lot of resistance by suppliers. This in turn had a negative impact on buyer adoption levels.
Revenue Model
The revenue model can impact upon the adoption levels, number of transactions and volumes traded as was the case with BTTransact, Dealcotton, Eutilia, IBX and Proceedo. O’Reilly and Finnegan state that a subscription based model is the most successful as participants are aware of the cost of use in advance. For example, Proceedo initially adopted a transaction based revenue model charging buyers only. They later changed to a subscription model with fixed-term contracts for a pre-negotiated amount. This increased buyer adoption.
Product Offering
The launch of innovative products can impact upon the adoption levels amongst buyers and suppliers, volumes traded and revenues. Globalcoal decided to generate greater interest from the Japanese and Asian markets by creating an accurate Asian index. This resulted in increased volumes being traded on Globalcoal financial markets.

Personnel
Personnel who are highly knowledgeable within a certain market sector can provide invaluable insights to consumers, thus improving performance through adoption levels and revenue. Comdaq operates in a number of commodity markets with their best performing market being metals. This feat can be attributed to the knowledge of the Comdaq metal employees.
Ownership
Investor Objectives
Investor objectives impact on both investor commitment and governance efficiency. These objectives can be broadly categorised as transactional, financial or fear. Investors who are motivated by transactional benefits tend to be the most committed, whereas those motivated by financial gain are the least committed.
Investor Commitment
Investor commitment is one of the most important strategic factors which impacts on performance. When designing a market it is essential to gather interest from investors who are interested in the transactional benefits of the market, and are willing to use the market to establish a base of users and confidence in the market.
With IBX, all investors were highly committed to using the market for their procurement needs and all signed three year service license agreements to use IBX which led to the market’s success. In contrast, five of Eutilia’s investors didn’t commit to actively use the market to procure goods which impacted on revenues and profitability.
Governance Efficiency
Governance efficiency deals with the decision making aspects of upper management/board in relation to the marketplace. Achieving consensus is extremely difficult if investor commitment is low.
In the case of Eutilia, the indecisiveness of investors to use the market for their procurement needs resulted in a lack of efficiency. After a change of ownership in 2004, a new structure was put in place which reduced the number of investors. The investors that remained were highly committed. This in turn improved governance efficiency. Eutilia abandoned transaction services and focused on supplier optimisation, thus increasing revenues and the number of active buyers.
There are many more examples of how design can impact upon performance of an e-marketplace. One such example is the story of eBay versus Amazon. Both e-markets debuted in 1995, with eBay experiencing most of the early successes between the two.

Amazon initially launched as an online bookstore but soon added movies, music, electronics and other goods. It was very much focused on brand recognition and economies of scale. Amazon operated in a one to many scenario, with one seller (Amazon) and many buyers. Their goal was to increase traffic by offering low-cost products.
On the other hand, eBay facilitated buyers by offering almost anything that could sell. eBay is seen as an intermediary which sits between many buyers and many sellers, and is very much a communication platform between the two.
Today, the business models of eBay and Amazon are considered to be quite similar. In 2011, Amazon switched their market design and adopted third party sellers, thus giving consumers more choice. They now connect many buyers and many sellers. This had a negative impact on eBay, and Amazon is now considered to be outperforming eBay in both revenue and market share. Amazon’s active user base is estimated to be around 260 million compared to eBay’s 152 million.

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