7.03.07: how not to…

…build an online market.

Review of: Kollock, P., and Braziel, E. R. (2006). How Not to Build an Online Market: The Sociology of Market Microstructure. Advances in Group Processes: Social Psychology of the Workplace, edited by S. R. Thye and E. J. Lawler. New York: Elsevier Science.

The 4+ assumptions (you already know the old adage of breaking down the word assume? Assume, makes an ass of you and me.)

A.1: Change could be made in the way industries did business.

A.2: It makes sense to aggregate dispersed buyers and sellers into a single market (additional assumption required here, that fragmented markets trade the “same stuff”).

A.3: Model B2B market after mature, established commodities markets with expectations of an efficient market driven by price.

A.4: Identity and social relations networks were unimportant to market functionality and

(A.5:) Thus that B2B markets could afford to cut out the middlemen, allowing direct marketing.

Basically, the mess started when they assumed an online market could function like existing, well established commodities markets. NOT! But then, I suppose they had to start somewhere. Actually, it is not a bad idea for some commodities and in some areas, as shown in their Texan propane example. If the market has enough players (as it does in Texas) and there is enough similarity in product, then anonymity can be established, allowing for a fair trading environment. Problem is, size matters and as with the California propane example, business in a limited market gets personal quick.

The challenges and social trading market described is one familiar to a small town business person. All the players are known, individual business conditions become widely known rapidly (through those unimportant social relations) and thus market advantage is lost/gained. Also, businesses in the same small town frequently share the same market challenges, for example, of transportation and labor costs. Propane market players in California shared the same constraints, no local fuel source, everything had to be transported in overland. With high transportation costs, as an expensive energy choice, other options would be more widely used, hence the market size smaller and the number of players required fewer. Texas has exactly the opposite, lots of local propane and many players. So though it was all propane, with the market differences, it was not really apples and apples as the “product” was not standardized enough to compare equally.

I was delighted to see the authors point out social relations network for problem solving and the reciprocating favor/obligations phenomena. “Informal economy of reciprocal favors”. As they point out, contracts do not cover every eventuality and so the middle men, traders, dealers real skill lies in maintaining relations and being reliable so they can call in favors to fix a problem quick. This is the trait of a good problem solver and apparently, the successful trader. It works, as long as both ends of the deal hold up their end and do not over use their resources good will. Knowing when to ask and when to back off, is a skill in and of itself. These skills work in a “small”, “local”, personalized market where phones and in person contact are still manageable. Interestingly enough, with business hierarchical strata in place, nearly every business market can become “small” enough at the higher levels and “local” enough in a market complex enough to have ongoing problems to solve. Once things can be streamlined, made efficient enough, processes trouble free enough, social relationships aren’t as necessary.

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About ifarmurban

Project Manager residing in sleepless Seattle.
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