Competition between B2B Electronic Marketplaces

Fueled by vast investment and immense management interest, B2B electronic marketplaces are rapidly evolving into a new volatile intermediation/informediation industry. While much work has been done on the efficiency and welfare of a single marketplace, the competition and interactions between marketplaces remain largely unexplored. This research attempts to analyze the dynamics of competition between B2B emarketplaces with a focus on industrial structure and the pricing strategies under the structure. Building upon Gehrig 1996 model of financial intermediation, we use a two-stage game theoretic model to explore the competition between B2B e-marketplaces. Business traders who use different IT infrastructures are modeled as being on different islands and are not able to trade with each other directly. B2B marketplaces invest to build networks that connect the islands and bring buyers and sellers together. The larger the network is, the higher the liquidity of the marketplace. B2B marketplaces play a two-stage game. In the first stage, they simultaneously choose the IT infrastructures they want to support, thereby determine the liquidity of the marketplaces. In the second stage, they compete on the prices of their services, whose qualities are differentiated in terms of liquidity. We study the characteristics of market equilibrium, the resulting industrial structure as well as its sensitivity to the market size. So far, our analytical results show that the price competition between B2B exchanges is imperfect as in markets of vertically differentiated products. Moreover, the industrial structure of B2B exchanges exhibits a natural oligopoly in the sense of Shaked and Sutton (Econometrica, 1983, 51, 1469-1483). The number of active B2B exchanges in a market is bounded regardless of the market size.