There are precious few studies of markets in practice – the day-to-day details of how buyers and sellers accomplish a transaction and manage their risks and opportunities. This is a great shame for both researchers and market participants, but also understandable. Gaining access to a market can be a serious challenge, both in terms of being accepted into what is often a closed community known to only a few, and in terms of becoming literate in the complex details of the products, industry, and the way deals are done.
Even more difficult is the effort to compare and contrast across a whole range of different markets in order to uncover unappreciated commonalities or to identify key distinguishing characteristics. And rarer still is the ability to observe markets at their birth, studying their emergence and learning from the successes and failures. Remarkably, we have been provided with just such an opportunity in the attempts in the late 1990’s to build hundreds of new
wholesale business markets online.
The attempts to build new online business-to-business markets – termed “B2B” – were fueled by many factors. Recent retail sites such as Amazon, Yahoo, and eBay were enjoying enormous success, and these markets paled in comparison to the size of wholesale business markets, suggesting an enormous opportunity. Cheap capital, in the form of “easily” obtained venture funding, and a land-grab mentality created a manic effort to fund and start up wholesale online exchanges in an astonishing array of industries. Business-to-business markets were established in dozens of different sectors, including chemicals, metals, electronic components, bandwidth, lumber, paper, and various energy commodities. The hope was that these new exchanges would aggregate and streamline existing fragmented markets, providing much more efficient trading and increasing trading opportunities. There was also the hope that these efforts would generate a huge financial return for shareholders by taking the exchanges public in the IPO market. While the efforts became ludicrous at times, there were many serious attempts to create new electronic markets, either as a supplement or a substitute for existing business markets.
The vast majority of these attempts failed. While this was a painful outcome for the employees and investors of these ventures, it also provided an historic opportunity to study the necessary foundations of markets and the social dynamics that drive them.
Download: How Not to Build an Online Market: The Sociology of Market Microstructure
