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Roger Clarke's 'Taxonomy of Electronic Markets'

A Taxonomy of Electronic Markets

SKETCH of 4 September 2009

Roger Clarke **

© Xamax Consultancy Pty Ltd, 2009

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This document is at http://www.anu.edu.au/people/Roger.Clarke/EC/EMkts-0909.html


Abstract

This paper presents a taxonomy of market forms in the electronic context, and identifies key factors that determine the appropriateness of each market form to particular contexts.


Contents


1. Introduction

In (Clarke 2001), a set of dimensions of B2B markets was identified. The purpose at that time was to support an analysis of successes and failures among so-called 'B2B Exchanges'. These were mostly failures, and it was postulated that a major reason underlying the failures was mis-fit between B2B Exchange designs and the needs of the parties that the Exchanges were offered to.

This paper is intended to build on that prior work by providing a structured set of alternative market forms. It is in effect the obverse of the previous analysis, because it provides guidance to designers in their selection of appropriate market forms, rather than an analytical tool for post mortem examinations.

[Once the structure is clear, it will be described here]

The paper begins with a brief review of the nature of trading, followed by a statement of a working definition of a market. Key features of markets are described, in order to lay the foundations for guidance in the design. The primary basis for categorisation is proposed as the price-setting mechanism. Several common categories of market mechanism are described in greater detail, and guidance provided in relation to the determinants of appropriate market designs.


2. Markets

This section provides a brief overview of the nature of markets, as a basis for the proposal of a working definition of the term suitable as a basis for the development of guidance in the selection of suitable market forms.

2.1 The Nature of Markets

A market is a context within which goods and services are transferred from entities that have them to entities that want them. Key functions that the context must support are mutual discovery by buyers and sellers of one another and their offerings and needs, and the facilitation of transactions.

The term 'market' was also originally close to synonymous with 'marketplace', and was associated with physical locations. The term 'marketspace' is used to distinguish the virtual contexts that have been enabled by advances in information technology, that have greatly extended market reach and thereby enhanced market depth, and that are the subject-matter of eCommerce (Rayport & Sviokla 1994, Clarke et al. 2000, Weill & Vitale 2001, Clarke 2001).

Marketspace transactions commonly comprise exchange of value between two parties, facilitated by infrastructure, perhaps supported by a marketspace operator, perhaps mediated by agents or brokers, and perhaps supported by service providers. Exchange is usually reciprocal, but may involve indirect recompense, or even no recompense at all. The reciprocity may be immediate, but may be deferred. The tradable items that are exchanged may be goods and services of any kind, whether physical or digital in nature, or cash or some equivalent, or promises or non-visible rights (Clarke et al. 2000).

A primary characteristic of an effective market is sufficient scale to attract at least parties that perceive intrinsic value in the tradable items, and preferably also traders. Scale requires not only sufficient parties but also sufficient transactions.

A market commonly (but not necessarily) involves parties that have an interest in some intrinsic value that they perceive the items to have. From the point of view of those parties, it is important that transactions can be relied upon to take place (or, as it is often expressed by economists, for a current price to be visible), and that prices are not subject to substantial distortions arising from the operation of the market itself.

A market commonly (but not necessarily) also involves parties that have an interest solely or predominantly in 'taking a turn on the rate'. From the point of view of traders, the volume of trading is of consequence, but a reasonable degree of price-volatility is essential.

Another important feature is comprehensibility. The scheme as a whole must be sufficiently coherent that intended actors believe that they understand it sufficiently well to make reasoned business judgements. The actors include sellers and buyers, but also marketspace operators, insurers and lenders

A wide range of alternative market-mechanisms exist whereby trading can occur. In order to work towards useful guidance for selection among market-types, it is important to achieve clarity in what a market is.


2.2 Working Definition of a Market

This sub-section is intended to cut through the ambiguities and put forward a definition that can underpin a usable taxonomy.

Kambil & van Heck (1998) described markets as "real or virtual meeting places where buyers, sellers, and intermediaries, meet to exchange or transfer property rights from one party to another". This contains some elements that are essential (e.g. buyers and sellers), and some that are not (e.g. intermediaries). It is ambiguous about some kinds of parties (e.g. lenders and borrowers, and sponsors and sponsees), and excludes others (e.g. donors and donees). The acts it encompasses are broad ("exchange or transfer"), and it encompasses transfers of items where a party that is paying may not be the party that receives the item passing in the other direction. But it may exclude some kinds of tradable items (e.g. a loan may or may not be a property right).

Care is needed to ensure that the scope is appropriately broad. The working definition proposed is:

A market is a mechanism for the transfer of tradable items, from entities that have them, to entities that want them.

A market is a mechanism. It is not a transaction, but an enabler of transactions. It is not a group of parties, but a means whereby parties can discover one another and one another's needs, and can conduct transactions. It is not an infrastructure, but a set of processes that depend upon infrastructure.

The neutral term 'transfer' is used, in order to avoid 'sale' and 'purchase' (which are two particular forms of transfer'), and to thereby encompass other forms such as barter and gift.

The neutral term 'tradable item' is used, in order to avoid the limitations of terms such as 'good' and 'service', to encompass cash and its equivalents, and promises of cash, and to cater for both physical and digital items.

A marketplace is a physical location and associated processes, whereas a marketspace is a virtual context in which entities discover one another and transact business

The necessary elements of a market are:

Optional additional features of a market include:


3. Key Features of Markets

In designing a market, a wide range of factors need to be considered.

[This is a recent version of the slide-set I've been using for the last 10 years]

[The relevance of each category needs to be assessed]

Market Phases:

Core:

Additional features beneficial, and even necessary, in some contexts:

Pre: Pre-Qualification

Post: Accounting for Successive Usages

Post: Enforcement and Recourse

What Marketspace Operators Offer:

Risks in Marketspaces:

Categories of Inter-Party Relationships

Categories of Inter-Party Topology

Categories of Value-Exchange

Categories of Commercial Arrangements

Categories of Buyer Behaviour


4. Alternative Price-Setting Mechanisms

There are various ways in which market-forms can be differentiated. One of the most useful dimensions is according to the mechanism whereby the price is set. This section provides firstly a classification scheme, and secondly an outline description of important examples.

4.1 Categories

Some schemes are inherently to the advantage of the seller, and some inherently to the advantage of the buyer. Examples of seller-driven markets are catalogues with fixed prices and auctions types of various kinds such as English and Dutch, whose purpose is to stimulate a high sale-price. Buyer-driven market designs reflect the interests of the buyers, and include Request For Proposal (RFP, for Tender (RFT), and for Quotation (RFQ).

Some market designs, on the other hand, are balanced, and encourage buyers and sellers, and especially traders (who are successively buyers and sellers, often repetitively so), by avoiding inherent bias in favour of either party. Common forms of balanced market are negotiation processes and clearinghouse auctions, also known as exchanges.


4.2 Examples

This sub-section provides outline descriptions of several instances of market-forms that are of particular importance in eTrading.

Auction

[Need to reflect here the inconsistent literatures on the topic]

A particular kind of trading process where price is the key factor to be negotiated and offers are simple, stating price, perhaps quantity

Auctions are particularly applicable to commodities (i.e. undifferentiated goods and services)

Common Categories of Auction

English Auction

Clearinghouse Auction - Special Challenges

32 Common Categories of Auction

Engelbrecht-Wiggans (1980)

Slide 24 - A wide range of mechanisms exist whereby trading can occur. For tradable items that have been contrived to be commodities (i.e. undifferentiated, one from another), there are no further attributes that need to be negotiated beyond quantity and price, and hence the trading mechanism is essentially a price-setting mechanism. Some schemes are inherently to the advantage of the seller, and some inherently to the advantage of the buyer. Some, on the other hand, encourage buyers and sellers, and especially traders (who are successively buyers and sellers, often repetitively so), by avoiding inherent bias in favour of either party.

Slide 25 - A small sub-set of all the possible trading mechanisms is particularly common. For seller-biased markets, variants of English (ascending) auctions are much-used, but Dutch (descending) auctions also work well in particular contexts. The primary form of balanced marketspace is a 'clearinghouse auction', commonly referred to as an 'exchange'.


5. The Selection of Appropriate Market-Types

Different forms of trading, and eTrading, are appropriate to different categories of tradable items (Clarke 2001). For tradable items that are commodities, or that have been contrived to be commodities (i.e. undifferentiated, one from another and hence substitutable), there may be no further attributes that need to be negotiated beyond quantity and price, and hence the trading mechanism is essentially a price-setting mechanism.

Apply Clarke (2001) categories and analysis, which recognises the following dimensions of differentiation:


6. [An Empirical Component?]

TEXT


7. Implications

TEXT


8. Conclusions

TEXT


References

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Added 3 Sep 2009:

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Wikipedia Entries:


Acknowledgements

TEXT


Author Affiliations

Roger Clarke is Principal of Xamax Consultancy Pty Ltd, Canberra. He is also a Visiting Professor in the Cyberspace Law & Policy Centre at the University of N.S.W., and a Visiting Professor in the Department of Computer Science at the Australian National University.



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