The sustainability of B2B e-marketplaces: Ownership structure, market competition, and prior buyer–seller connections

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Abstract

B2B e-marketplaces alter the structure of buyer–seller trading networks. To study the network-level structural changes caused by the emergence of e-marketplaces, we develop a multiple-player noncooperative game, where rational firms select optimal interfirm connections and the network is endogenously formed and evolved. We examine the conditions under which both neutral and biased B2B e-markets will sustain, when previous buyer–seller connections exist. We test our model in both the oligopoly market and the oligopsony market. Our analysis explains how ownership structures and market competition interact with each other to affect e-market sustainability. We also identify other critical factors for sustainable e-markets and their social welfare implications.

Introduction

B2B e-marketplaces match buyers and sellers with automated transactions, lower search costs, and increased process effectiveness and efficiency [5], [6], [18]. The emergence of such e-marketplaces represents one of the major market transformations brought about by the proliferation of information technologies [14], [24]. However, despite firms' enthusiasm in Internet-based B2B e-marketplaces, the growth of B2B transactions has fallen short of earlier expectations [10]. Most notably, the shakeout of B2B e-markets1 during the late 1990s and early 2000s has spurred skepticism about the earlier high expectations about the role of these e-markets. A large number of B2B e-markets, such as Chemdex and Adauction, went out of business, while others, including e-Steel and Covisint, changed their business model from e-market operators to technology service providers. Nevertheless, there are still hundreds of B2B e-markets, such as World Wide Retail Exchange and SciQuest, that have survived and thrived [22]. It is thus intriguing why some e-marketplaces have survived while others have failed and what key factors lead to a sustainable e-marketplace.

In this paper, we try to answer the question by focusing on the structural dimension of e-markets [12], which refers to the overall pattern of connections between firms. The structural perspective provides us insights into network stability, when individual firms strategically establish interfirm links. The resulting network and the firms' relative positions in the network determine their bargaining power and performance. When equilibrium is reached, both participating firms and the market operator are willing to keep their existing connections. This implies the emergence of a sustainable B2B e-market. Otherwise, the e-market will fall apart and evolve into other business models or exit the market.

We develop a multiple-player non-cooperative game to simulate the endogenous formation of public B2B e-marketplaces (many-to-many connections). In the model, we describe the overall network structure as a graph, in which rational and self-interested firms are nodes and their business relationships are the edges between corresponding nodes. Buyers and sellers select individual connections in the game, and their payoffs are determined by the overall network structure and their relative positions in the network. We focus on three major factors that affect the endogenous formation of B2B e-markets (Table 1). The first factor is the ownership structure of the e-market. An e-market can be either neutral or biased [30]. A neutral e-marketplace, such as EC21 and Alibaba, is owned by an independent intermediary, while a biased one is operated by a group of buyers (e.g., World Wide Retailer) or sellers (e.g., iSteelAsia) [30]. For the biased type, we focus on buyer-biased e-marketplaces and then show that seller-biased e-marketplaces demonstrate similar properties.2 Since previous studies suggest that neutral and biased e-markets have difference properties [30], we also examine whether the ownership structure will affect e-market sustainability. The second factor is the type of market competition faced by both participating firms and the market operator. An e-market can be established in either an oligopoly market or an oligopsony market. In an oligopoly market, there are more buyers than sellers and buyers face more intensive competition. Examples include natural resource markets and major distributors, such as Ingram Micro, who transact with a large number of resellers/buyers. In the oligopsony market, there are fewer buyers than sellers. Contrary to the oligopoly market, buyers have a major advantage over sellers in the oligopsony market. For example, the market in which major retailers, such as Wal-Mart and Target, deal with a large number of suppliers can be characterized as an oligopsony market. Will market competition affect the equilibrium of e-markets, since buyers and sellers have different bargaining powers in an oligopoly market compared to an oligopsony market? Prior theoretical work is limited in this area. The third factor is the impact of preexisting buyer–seller connections prior to the emergence of e-markets, as firms often have direct exchanges for doing business in the absence of e-marketplaces. For example, the defense contractor Raytheon had used in-house developed tools to connect with its own suppliers before it joined Exostar, an e-market cofounded with other large manufacturers in the aerospace and defense industry [31]. A B2B e-marketplace can either bring prior disconnected firms together or substitute previously existing direct buyer–seller connections. To the best of our knowledge, this is one of the first papers to investigate the process of how B2B e-markets supersede direct buyer–seller networks.

Our analysis yields several insights on the sustainability as well as social welfare impacts of B2B e-marketplaces. First, it demonstrates the interactions between market competition and ownership structures of e-markets. The emergence of a neutral e-market does not change market competition, and the sustainability conditions are the same in either the oligopoly market or the oligopsony market. By contrast, the emergence of a biased e-market changes market competition by leading to the formation of a buyer or seller consortium. We find that a biased e-market formed by the more competitive side is less likely to survive than one formed by the less competitive side. Second, our analysis underscores the importance of considering prior buyer–seller connections, which determine firms' incentives to join the e-market and the efficiency gains provided by e-markets. Third, sustainable e-marketplaces require low e-market connection costs to attract firms' participation. Furthermore, the impacts of the number of buyers and sellers on the e-market sustainability are different depending on the ownership structure. Lastly, we show that social welfare is improved with the emergence of a neutral e-marketplace, but the change in social welfare is ambiguous in the case of biased e-marketplaces.

The rest of our paper is organized as follows. We first review the related literature in network economics and B2B e-marketplaces. In Sections 3 and 4, we present our model and apply it to study direct buyer–seller networks and to establish the pre-e-market equilibrium structures in both the oligopoly market and the oligopsony market. In Sections 5 and 6, we study the formation of a neutral B2B e-marketplace and a buyer-biased e-marketplace, respectively. We then discuss theoretical contributions, policy implications, and future research opportunities.

Section snippets

Literature review

Economists have used the game theoretical approach to model network formation for over a decade [4]. This line of research suggests that network structures are important in determining the outcomes of economic and social interactions, such as bilateral product exchanges and technology adoption [16], [27]. Previous studies also identify typical network structures and their stability conditions under various circumstances [7], [21]. In this paper, we consider B2B e-markets as an exchange network

Model framework

In this section, we introduce our basic model framework and our assumptions.

Direct buyer–seller networks: the pre-e-market structure

We first study the pre-e-market structure, where buyers and sellers exchange goods via direct network connections. Later, we will show that the emergence of B2B e-markets not only alters individual buyer–seller connections but also changes the overall network structure [26]. In this paper, we will not discuss the case in which e-markets supersede physical markets and the network structures remain the same before and after the formation of e-markets (see Bakos [7] for an excellent discussion

The emergence of a neutral B2B e-market

In direct buyer–seller networks, firms have to keep multiple links in order to maintain a strong bargaining position and achieve efficient good exchanges. With the entry of a neutral e-market, a large number of buyers and sellers can be connected to the other side with only a single link to the intermediary (Fig. 2). Buyers and sellers want to link to a neutral e-market to save on individual link costs.

Neutral e-markets, such as EC21 (http://www.ec21.com/) and Texileweb (//www.textileweb.com

The emergence of a biased B2B e-market

In addition to neutral intermediaries, e-markets can also be initiated by either the buyer or seller side of the market. For instance, a group of buyers can aggregate their purchasing power by organizing a buyer-biased e-market (also called buyer consortium) and charge entry fees to participating sellers. A seller-biased e-market is the exact mirror case of a buyer-biased e-market, thus we discuss only the buyer-biased case in this paper. In a buyer-biased e-market, such as World Wide Retail

Discussion, managerial implications, and concluding remarks

In this paper, motivated by the e-commerce shakeouts a few years ago, we studied the conditions for B2B e-markets sustainability. We developed and solved a multi-player noncooperative game to examine the emergence and dynamics of B2B markets. Our paper makes several theoretical contributions. First, we provide a model of the network-level analysis of e-markets and demonstrate the structural changes brought by new B2B connections. Second, our analysis reveals the interaction between e-market

Kexin Zhao is an assistant professor of MIS at the Belk College of Business at the University of North Carolina–Charlotte. She received her Ph.D. degree from the University of Illinois at Urbana-Champaign in 2007. Her research interests are economics of information systems, development and adoption of e-business standards, and game theory in information management. She has published one book chapter and several peer-reviewed journal papers. Her teaching interests include introduction of

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    Kexin Zhao is an assistant professor of MIS at the Belk College of Business at the University of North Carolina–Charlotte. She received her Ph.D. degree from the University of Illinois at Urbana-Champaign in 2007. Her research interests are economics of information systems, development and adoption of e-business standards, and game theory in information management. She has published one book chapter and several peer-reviewed journal papers. Her teaching interests include introduction of business computing, system analysis and design, electronic commerce.

    Mu Xia is an assistant professor of Information Systems in the Department of Business Administration in the College of Business at the University of Illinois at Urbana–Champaign. He received his Ph.D. in Management Science and Information Systems in 2001 from the University of Texas at Austin's Graduate School of Business (now McCombs School of Business), in addition to a Bachelor's degree in Automatic Control from Tsinghua University, China. His research interests are the economics of online communities, the economics of open source and collaborative e-business standards development and adoption; business-to-business e-commerce and combinatorial auctions.

    Michael J. Shaw is the Hoeft Endowed Chair in Information Technology Management and Director of the Center for Information Technology and e-Business Management at College of Business. He received his Ph.D. from the Krannert School of Management at Purdue University. Professor Shaw is the editor-in-chief of the journal Information Systems and e-Business Management, and he has published extensively in leading academic journals. Among Professor Shaw's recent books are the Handbook in Electronic Commerce, Information-Based Manufacturing, and e-Business Management. Currently, Professor Shaw works in the areas of e-business strategy, human–computer intelligent interaction, IT management, and knowledge management.

    Chandrasekar Subramaniam is an assistant professor of MIS at the Belk College of Business at the University of North Carolina–Charlotte. He received his PhD at the University of Illinois at Urbana–Champaign in 2003. His research projects have been funded by corporations such as Caterpillar, Motorola, and State Farm Insurance and the Center for e-Business and IT Management at the University of Illinois. He has published in several leading journals in information systems and contributed chapters for two books on electronic commerce.

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