I was having a discussion with a Hedge fund manager about market places and why so many fail.
What was clear is that markets generally have three players, the market place, buyers and sellers. And there are three states that can exist (well 4 but the last one doesn’t really matter)-
- Many sellers and few buyers – Buyer dominant
- Many buyers and few sellers – Seller dominant
- Few buyers and few sellers – void
- Many buyers and many sellers – Network
Very simply, in a void, theres no business, its not worth entering, in a Buyer or Seller dominant market the marketplace simply ends up as an agency (more on this later) so the only ‘true’ market for a marketplace is in a network environment, in this environment the marketplace provides a platform for trade, literally the definition of a marketplace, as a simple case study, look at the stock markets, there are thousands of investors, just as there are thousands of stocks, the marketplace has no real bias to either side of the market; however the moment one side has too much power its no longer a marketplace, but rather an agent the dominant side can exert influence over the prices e.g. trip.com (flights), here we see what appears as a market place of flight options, but since they are only provided by a select few providers (seller dominant) the reality is true free-market economics don’t apply, buyer have no real power or choice, trip.com is simply a window through which buys can shop, in effect, they are an agent to the flight providers. In contrast you could consider Mumsnet or comparison to be an advertising ‘marketplace’ for brands, but in reality they are simply agents as well, what you encounter is a price race to the top to secure the eyeballs of the buyers, the sellers have no real power to drive the price down, this eats into margins.
In contrast uber or airbnb or eBay show ‘true’ network market places, since both sides of the market are more fairly balance, the market becomes self correcting based on the movements of either side of the market.