Markets connect buyers and sellers, bringing them together to carry out mutually beneficial transactions.
Village and town markets are still popular because they give people a chance to come and browse the goods on offer, compare between different sellers and choose something they like.
Usually, there is enough business for everyone – but the markets themselves are operated and regulated by something like the town council.
Online marketplaces take the same idea and create a platform to do this instead – and there is a rush to create new platforms at the moment.
We see marketplace systems to make transactions easier in everything from selling houses to paintings, from comparing energy suppliers to recruiting freelancers in a gig economy.
An article in the Harvard Business Review by Andrei Hagiu and Simon Rothman sets out some of the key things to look out for when creating an online marketplace.
The point out that the network effect – where reaching a critical mass of users that then results in exponential growth – is not enough.
What is more important in getting a market working is that it gets the buyer-seller fit right.
The platform will only work when both sides are happy.
This means that transactions need to be mutually beneficial. Both sides need to be happy with what they get.
But, the parties don’t know each other – it’s the marketplace that brings them together.
So, the market needs to create a safe, trusted environment – by providing contracts, guarantees and insurance.
The point of a market is to help people easily compare goods and services – reducing the search costs of finding information, reducing the friction involved in negotiating a transaction and lowering the total cost of doing a deal.
This is the equivalent of a well-lit showroom, where we can walk around and compare things and see the good and bad points.
Doing these basics correctly will mean that it is more likely that buyers and sellers will enter into deals and come back to do more of them.
Having lots of buyers and sellers then creates a liquid market, one that becomes self sustaining and is used repeatedly.
That’s the point where the marketplace has staying power and is likely to be around for a while, and the marketplace operator earns a good commission on providing it as a service.
The final point raised in the article is that marketplaces need to contribute to society.
They are centres of commerce online, and so the tax collectors and regulators are interested in them.
They want to get their share of the profits and make sure people’s rights are protected.
Marketplaces are the future of business – when we walk down high streets in towns now they are often a dismal collection of charity shops, pound stores and cash advance places.
Business is moving online to new marketplaces.
And, some of us will create some of them.