Governing Electronic Business-to-Business Markets
May 12, 2010
Governance mechanisms for business-to-business (B2B) electronic markets work best if tailored to each market individually. Smeal’s Rajdeep Grewal highlights three governance mechanisms: monitoring, community building, and self-participation. Based on the level of behavioral and external uncertainties, market makers must decide which mechanisms to emphasize to generate growth and financial success within the market.
In response to the growing impact of business-to-business (B2B) electronic markets on the economy and business transactions, a marketing professor at the Penn State Smeal College of Business and his coauthors discuss ways for market makers to manage and govern electronic B2B markets.
“Since electronic markets lack the tangibility and visibility of a physical infrastructure, the market maker is challenged to emphasize the appropriate governance mechanisms to ensure growth and financial success of the electronic market,” say the researchers in their paper “Governance Mechanisms in Business-to-Business Electronic Markets” forthcoming in the Journal of Marketing.
Rajdeep Grewal and coauthors Anindita Chakravarty of the University of Georgia, also a Smeal Ph.D. student, and Amit Saini of the University of Nebraska-Lincoln highlight three governance mechanisms: monitoring, community building, and self-participation and help market makers determine which works best for their market.
Monitoring refers to the actions a market maker takes to maintain order and discipline within the market, while community building develops trust within the market and decreases the likelihood of opportunistic behaviors, like lying and cheating. Self-participation occurs when the market maker interacts directly in the market as a participant (i.e., buyer and/or seller) to gain knowledge on the functioning of the market.
In order to analyze the effectiveness of the governance mechanisms, the researchers address how three sources of behavioral and external uncertainty can influence the success of the mechanisms.
Behavioral uncertainties can be attributed to either the market maker’s reputation or the price making mechanism of the market. “These types of uncertainties are in control of the marketplace and arise from buyers and sellers getting together,” says Grewal.
External uncertainties are due to the volatile nature of the demand environment surrounding the market and its participants.
“Because the three governance mechanisms are differentially effective under different aspects of behavioral and external uncertainty,” the researchers explain, “market makers should recognize how each can be developed, implemented, and maintained in the context of electronic markets.”
What’s a Manager To Do?
After surveying B2B electronic markets, the authors find that based on which uncertainties surface, the market monitors can choose to emphasize or deemphasize any of the three governance mechanisms.
Highly reputed market makers should emphasize monitoring and self-participation “given that reputed market makers appear unobtrusive in their monitoring and reputed self-participating market-making firms do not provoke concerns about self-interest–seeking behaviors,” say the authors.
In a dynamic price setting, like auctions, market makers should emphasize self-participation, so they are able to experience uncertainty within the market first-hand and take action to decrease it if need be.
On the contrary, the transparency of a static pricing electronic market makes community building the most appropriate governance mechanism.
If there is high demand uncertainty within the market, market makers should emphasize monitoring and deemphasize self-participation. “Monitoring helps fill information gaps about participant composition, expectations, and behaviors,” add the researchers. “Self-participation harms the electronic market’s performance because of frequent changes in the participants and their opportunistic behavior in dynamic environments.”
The authors address the various governance challenges and opportunities that arise for market makers and provide further direction to help them navigate volatile environments.
“The key challenge is to govern under uncertainty in the virtual environment,” they add. “The opportunity lies in the freedom to create a market for any product or service, global or local, as long as market makers make the right decisions about when to monitor, when to build a community, and when to self-participate.”
Source: www.research.smeal.psu.edu
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