Explaining Entry Decisions and Crowdedness in Business-to-Business Electronic Commerce Markets

Strategy and Entrepreneurship

Centre for the Networked Economy Working Paper

2001

Billions of dollars of venture capital were committed in 1998-2000 to fund new entrants in business-to-business (B-to-B) electronic marketplaces. B-to-B marketplaces offer compelling value propositions (reducing both frictional and relational transactions costs, aggregating buyer power, etc.) and exhibit economies of scale, network externalities and winner-take-all effects, which suggest that industrial concentration should eventually be quite high. We show empirically, however, using a detailed survey data set collected in 2000 from over 300 business-to-business exchanges, that markets with larger potential revenues attract significantly more than proportional amounts of entrants' attention, unambiguously predicting severe future shakeout. In particular, many of these new entrants are clustered in a small number of large, high-profile markets (such as chemicals and auto parts). We examine several competing theoretical explanations to assess compatibility with the observed data: economic analysis of market structure, under conditions of competition, oligopoly, and increasing return to scale; analysis of option value of early presence in markets requiring uncertain capabilities; and finally an agency explanation, with entrepreneurs seeking markets where fundability is assured, even at the expense of future profitability, which turns out to be largely supported.

Centre for the Networked Economy (closed)

CNE WP05/2001

Centre for the Networked Economy Working Paper

No

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