Online Marketplaces: Beyond the Number of Buyers and Sellers

Amazon is the world’s leading online marketplace. It sells nearly everything, and more people visit its website than any other e-commerce platform. Early-stage marketplaces are looking for ways to replicate even a fraction of Amazon’s success. They must quickly figure out how to attract and grow their seller and buyer base at minimal cost.

A common growth strategy for online marketplaces relies on the network effect. This means that having more sellers on a platform attracts more buyers, and vice versa. For instance, in the case of a ridesharing marketplace like Lyft, increasing the number of drivers reduces wait times, attracting more riders. In turn, more riders increase driver pay, which attracts more drivers. While this effect holds for Lyft, where drivers and riders are largely undifferentiated, the same is not true for e-commerce platforms like Amazon. The question is not just should I invite a new seller to my platform, but what kind of seller should I invite? While the network effect may apply to Amazon, it’s important to understand what kind of sellers and buyers are attracted, or potentially driven away, by a new addition. It’s like when you invite a new person into your friend group—it can change the dynamics, strengthening some relationships while weakening others. There is more to consider than just the number of people in the group.

Two professors from the University of Maryland Robert H. Smith School of Business have co-authored research examining what happens when a new marketplace invites a prominent, well-known retailer to join its platform. Senior Associate Dean for Faculty and Dean’s Chair of Operations Management Wedad Elmaghraby and Assistant Professor Ashish Kabra collaborated with Wenchang Zhang, an assistant professor at Indiana University’s Kelley School of Business.

“We examined how a prominent, high-performing seller shakes up the rest of the marketplace ecosystem,” says Kabra. When a high-quality, marquee seller enters a new marketplace, it attracts buyers who tend to also buy from the existing high-quality sellers on the platform. He says, “This makes the marketplace relatively more conducive to the growth of high-quality sellers. As a result, more of them may join, or existing high-quality sellers may expand their offerings.” On the other hand, when the marquee seller’s products are subpar, the buyers it attracts are more price-conscious, and the marketplace ecosystem becomes more favorable to low-quality sellers and price-conscious buyers.

These findings align with anecdotal evidence. For example, over a decade ago, Microsoft acquired Bungie, a renowned game developer, in order to make the popular game Halo available on Xbox. This acquisition helped expand Xbox’s user base and encouraged the creation of other high-quality games for the platform.

Conversely, during the same period, a major American-based online marketplace experienced revenue losses after inviting several large, successful sellers from China. It was later revealed that some of these sellers were offering counterfeit items, prompting reputable brands to reduce their supply on the platform.

This serves as a cautionary tale for new online marketplaces. Elmaghraby says their study warns ventures in the early stages of growth to be cautious about who they invite to join the platform. "It could take the tenor of their quality messaging in the wrong direction, and these decisions have spillover effects on other sellers who are already on the platform. It’s critical for new online marketplaces to carefully consider who they invite to populate their site.” It’s not just about getting as many sellers and customers as possible.

The key retailers a platform invites early on can shape its reputation, whether it’s known for high-end, expensive products or low-cost, affordable items. Either type of marketplace can be highly profitable, but the customer base for each will be very different.

The choice of which brand-name sellers to invite to a new online retail hub can significantly influence the direction of that marketplace. New virtual marketplaces must think carefully before extending that invitation.

The research, “Marketplace Expansion Through Marquee Seller Adoption: Externalities and Reputation Implications,” has been accepted for printing in the journal Management Science.