Electron Markets (2011) 21:41–51

DOI 10.1007/s12525-011-0057-z

SPECIAL THEME - POSITION PAPER

Twenty years of electronic markets research—looking

backwards towards the future
Rainer Alt & Stefan Klein

Received: 5 February 2011 / Accepted: 11 February 2011 / Published online: 5 March 2011
# Institute of Information Management, University of St. Gallen 2011

Abstract Over the past 20 years the field of electronic advantages of intermediated structures, an ongoing
markets has seen a considerable proliferation and differen- technological sophistication, as well as further innovation
tiation. This position paper takes the opportunity of the 21st in market mechanisms and services make electronic
volume of “Electronic Markets” to look back at important markets an enabler for many inter-organizational value
developments and insights, suggesting a framework that chains. While we are confident that the ingenuity of
captures the multiple facets and indeed empirical breadth inventors will yield a flow of innovations, recent
and depths of this concept. It comprises three perspectives economic crises have shed a dark shadow over the
which include the market environment, governance choices sustainability of electronic markets. They call for suitable
by economic actors as well as the entrepreneurial rules and regulation amenable to economic prosperity
dynamics of firms who initiate and operate market and stability to be agreed upon on a broad level.
platforms as their business. In addition, we propose to
study the interplay of technological, market, and institu- Keywords Market theory
tional drivers in order to understand the phenomenon of
electronic markets, which is also a precondition for JEL classification D4 . L14 . M15
designing electronic markets. Both activities involve
more than an economically motivated choice between
the discrete alternatives of markets and hierarchies. A brief retrospective
Rather, electronic markets are configurations across
multiple, interdependent dimensions: Technology is an It is 20 years that electronic markets emerged as a field of
important force in shaping the field, but needs to be research. While inter-organizational systems, such as
complemented by considerations of the competitive Electronic Data Interchange (EDI) in the transportation
environment and the setting of rules in order to ensure sector, computer reservation systems (CRS) in tourism and
efficient and effective plays of the game. Based on this electronic exchanges in banking date back even longer, the
framework, this position paper develops six propositions well-known “Electronic Markets and Hierarchies” article
for the future of electronic markets. Overall, the (Malone et al. 1987) and research projects, such as the
Center for Coordination Science (CCS) and the Compe-
Responsible editor: Doug Vogel tence Center Electronic Markets (CCEM) with the journal
“Electronic Markets” have marked important milestones for
R. Alt (*)
a more generalized research on electronic markets. As
University of Leipzig,
Leipzig, Germany mentioned in the editorial and the interview in this jubilee
e-mail: [email protected] issue of Electronic Markets, the paper on electronic markets
spawned a broad academic debate, which is still ongoing. It
S. Klein
has—directly or indirectly—inspired numerous entrepre-
University of Münster,
Münster, Germany neurs to develop electronic markets. The claim that the
e-mail: [email protected] development and diffusion of information and communica-
42 R. Alt, S. Klein

tion technology will lead to a shift from hierarchical carefully selected number of suppliers, spot sourcing
structures to market structures has become known as the pursues the goal of meeting an immediate (or single)
“Move to the Market” or electronic markets hypothesis demand from a number of competing suppliers. In the
(EMH). Although, the number of electronic markets has former sense, electronic markets would support network or
significantly decreased after the e-business hype, there are even hierarchical relationships and in the latter classical
still 645 electronic markets listed in the directory of market relationships. However, in both cases the respective
electronic marketplaces today (E-Market Services 2011). IT systems would classify as electronic markets.
“What we were trying to do […], was to predict broad, Third, the suitability of a specific form of governance
historical trends” Malone says in the interview covered in cannot be judged based on transaction cost considerations
this issue. In fact they did, so this position paper takes stock only. Production and coordination costs as well as asset
and makes sense of the developments over the past two specificity and opportunism are not explicitly including
decades and reflects directions for the future. factors, such as flexibility, adaptability, quality, trust and
In retrospective, electronic markets have two origins. innovation, which are critical when companies make (out-)
From the technological side, electronic markets comprise sourcing decisions. As soon as such non-contractible issues
the application of information technology (IT) to support are present, the number of suppliers will be limited as the
communication and allocation purposes among multiple respective business partners are required to make rela-
actors in one or multiple value chain(s). Well-known tionship specific investments (Bakos and Brynjolfsson
examples are Electronic Data Interchange (EDI), electronic 1993, 51). Furthermore, the frequency of exchange, access
catalogs as well as matching and auction mechanisms. to knowledge and industry structure, also influence the
Together with growing standardization these technologies suitable form of governance (Glassberg and Merhout
had important impact on the economic side, in particular the 2007, 54f). Obviously, rather than facing just a choice of
costs of organizing economic activity among organizations. governance modes, companies use the opportunity to
These transaction costs are prominent explanations for the configure complex coordination mechanisms.
feasibility of markets or hierarchies and for deriving Fourth, the EMH is closely related to contingencies of
expectations on future developments, such as the EMH. economic activities. Although IT may have reduced
However, despite the ongoing technological innovation in transaction and coordination costs as well as extended the
areas such as Internet protocols, electronic trading agents, scope of products that can be coordinated via market
standards, semantics and ontologies, technology does not principles, the “Move to the Middle Hypothesis (MMH)”
determine the choice of governance structure. Understand- highlighted factors, such as market structures and transac-
ing the organizational, strategic and social implications of tion risks, which influence the success of market mecha-
the IT-based transformation is required to understand the nisms (Clemons et al. 1993). These contingencies reach
successful adoption and operation of electronic markets. from the external environment (e.g. regulation for property
While it is not feasible for a position paper to summarize rights), market structure (e.g. fragmentation, concentration,
20 years of electronic markets’ research, five key insights information asymmetry) to product characteristics (e.g.
shall be mentioned. information intensity, modularized offerings) and business
First, Malone et al. (1987) applied the nature of hierarchical practices (e.g. shared standards, settlement schemes)
relationships also to the inter-organizational setting. In (Giaglis et al. 2002).
particular, transactions between small and large businesses Fifth, the financial crisis in 2008 is a reminder of the
feature asymmetric power constellations which in conse- vulnerability of electronic markets and indeed of the entire
quence are similar to intra-organizational coordination. This economic system. The crisis has discredited the effective-
view had important practical implications since companies in ness of market mechanisms as highly complex financial
many industries strived to externalize activities and the products were electronically traded in global markets,
electronic integration effect inherent in electronic hierarchies which lead to unforeseen and apparently irrational situa-
has become an important element especially in the business- tions, most recently the Flash Crash on May 6, 2010
to-business (B2B) segment. Well-known application areas are (Frydman and Goldberg 2011). Traditional values and
the outsourcing of IT operation (ITO), application service principles, such as linking economic risk taking and
provisioning (ASP) or business processes (BPO). accountability, responsibility and economic prudence, were
Second, it has become clear that electronic markets are questioned and financial institutions had accumulated debt
far from representing a homogeneous class of systems. For and risks way beyond their financial means. As the
example, research on electronic markets in the B2B-area financial defaults of these institutions were feared to cause
has shown that these hubs may either support systematic or a vicious cycle of financial collapse and ultimately a threat
spot sourcing (Kaplan and Sawhney 2000, 98f). Whereas to the entire economy, understanding as well as regulating
systematic sourcing is based on long-term contracts with a them has become a key concern.
Twenty years of electronic markets research 43

Electronic markets and IT-based transformation: three rule “more gives more” or “volume drives volume” is not
perspectives on electronic markets only apparent in electronic markets and telecommunication
networks, but also in the recent rise of social media
In response to these insights of extant research in the electronic platforms, such as Facebook and Twitter. Another contri-
markets field and the growing proliferation and diversity of bution for the transformation of the entire economic
electronic markets, three distinct perspectives shall contribute to environment is Thomas Friedman’s popular treatise “The
structuring the electronic markets’ phenomenon (see Table 1): world is flat” (2005). In fact, most of the ten “flatteners” are
The broadest view is the market or industry environment results of the digital revolution (e.g. Netscape, workflow
which describes the IT-driven transformation of national and software, uploading or “The steroids”). In addition, sociol-
international markets (see e.g. Castells 1998; Benkler 2006). ogists (e.g. Castells 1998; Benkler 2006) have argued that
The second view captures the choices of economic actors this emerging electronic marketspace leads to profound
regarding the governance mode for their business transactions social, economic and political transformations. Following
(market, hierarchy or network, Williamson 1975, 1991) and these insights, this position paper argues that technological,
related issues of the design and combination of coordination competitive and regulatory changes need to be considered
mechanisms. The third view highlights the initiation, devel- together in order to understand the impact and the
opment and operation of electronic market platforms or transformation of electronic markets.
market intermediaries as business models and entrepreneurial First, electronic markets have become the commercial face
activity (see e.g. Kambil and van Heck 2002; Kaplan and of global communication infrastructures yielding a tightly
Sawhney 2000). In addition to the technological enablers, this networked world that has emerged over the past 20 years. The
framework also emphasizes the role of market forces (market commercialization of global computer-mediated communica-
dynamics) and rule setting (institutional design) in order to tion environments has permeated almost any facet of
explain the development of electronic markets. economic activity. Currently, social media—a “social” adop-
tion of global computer-mediated communication environ-
Electronic markets as economic environment ments—provide an impulse for a new wave of commercial
appropriation of a socio-technical innovation.
The past twenty years have seen a dramatic rise of the Second, new competition in the networked economy has
electronic marketspace (e.g. Eskelsen et al. 2009). IT and transformed the competitive landscape across almost any
electronic markets have shaped new industries and trans- industry. Information transparency has significantly increased,
formed entire sectors. This applies to e-business companies driven by entrepreneurs and innovators who created platforms
(e.g. eBay, Amazon) as well as to software companies (e.g. for comparison shopping, product ratings and user generated
Microsoft, SAP) and IT service providers (e.g. Google, content. Yet, companies have found new ways of avoiding all-
telecom companies). As explained by Kevin Kelly (1998) out price wars and created new forms of information
many of these information-based businesses are subject to asymmetries (Glassberg and Merhout 2007). The airline
the “New rules of the network economy”. For example, the industry is a prime example for a technologically driven

Table 1 Perspectives on electronic markets and drivers

Perspectives Electronic market as Electronic market as governance mode Electronic market as business model
economic environment
Drivers

Technology IT has become a key social IT makes more products and services IT enabled transaction infrastructures and
push and business infrastructure. amenable to market coordination. innovative value propositions.

Market New rules and levels of Competition between governance models Competition among electronic marketplaces
dynamics competition drive and between electronic markets drives drives service innovation and yields complex
innovation and market innovation of coordination mechanisms. configurations of governance models.
development.

Institutional Institutional settings shape Electronic markets are social institutions. Marketplaces are institutionalized transaction
design technology development environments.
and its deployment.
Political support and Effective regulation reduces transaction Governance and ownership structures are
regulation facilitate further costs, which implies regulatory success factors of electronic marketplaces.
development. competition.
44 R. Alt, S. Klein

transformation: low-cost airlines have changed the product market coordination into a broad and diverse array of
offering to make them more amenable to the Internet (point- domains from marketing, to health care or forecasting (see
to-point connections of unbundled, low-frills flights) as a first Table 2). Price-based coordination mechanisms have
step, which was followed by a push towards self-service benefitted from reduced information and brokerage costs
(booking and checking-in online) and an increasing portfolio and provided extended allocation efficiencies. Moreover,
of service components (e.g. checked luggage) or up-selling the research field of micro market design has contributed to
(more legroom) and cross-selling (rental car or hotel) options understand issues, such as price building or auction rules (e.g.
offered online. These strategic moves may also be seen as an Bapna et al. 2004; Neumann 2007).
attempt to increase direct sales and bypass online and offline While coordination efficiency, asset specificity and the
travel intermediaries. Other examples are the financial markets, complexity of product description were included in the early
which are often conceived as prototypes of electronic markets, model of Malone et al. (1987), they have barely addressed the
or telecommunication markets. The latter feature an intense issue of institutional design, even though this is part of
competition between network access providers within and transaction cost theory. In fact, successful electronic markets,
across different technological approaches and architectures: such as eBay or Amazon, invest substantial resources in the
power line, Cable TV, telecom networks/ phone cable, WIFI ongoing development of institutional rules to provide
etc. Leading to the next point, governments promoted this assurance, recommendations, user-generated content or to
development as broadband access is regarded as an important reduce information asymmetries. Moreover, the market
factor in the competitiveness of nations and regions. players (suppliers) are continually extending the repertoire
Third, governments have been key enablers and facili- of mechanisms to limit transparency and all-out price
tators of the electronic marketspace in many areas (Fligstein competition. As suggested by Kambil and van Heck (2002)
2001). For example, the industrial policy in the US in their book on market design, the design of the transaction
(National Information Infrastructure), the EU (eEurope), processes needs to be complemented with shaping of the
and numerous Asian governments (e.g. Informatization of trade context, i.e. the institutional design.
Nation and Society, Republic of Korea) aimed at develop-
ing the communication infrastructure for the economy and Electronic markets as business model
society at large. Research policy in most regions has also
led to significant governmental investment into research The third perspective focuses on centralized market struc-
programmes, which de facto supported the private sector. tures and takes the view of marketplace operators. They are
At least in some countries (e.g. the US) taxation policy has intermediaries that address information imperfections
been facilitating e-business (the sales tax advantage, Stibel (Spulber 1996, 136). Their success is ultimately determined
2010). Legal frameworks were crafted in order to balance by transaction volumes and the bid-ask spread.1 Research
the risks between service providers and consumers, specif- on intermediation in financial markets has contributed
ically consumer protection and privacy laws e.g. in the EU. various models for determining the bid-ask spread and
Finally, social policy addresses issues, such as education, confirmed welfare effects (e.g. Cosimano 1996). While it
cultural heritage and social inclusion (e-Inclusion) aiming highlights the price discovery function, it also recognizes
at a broad based societal diffusion and support. In sum, that technology has provided multiple other sources of
technology expertise and familiarity have spread across all value for intermediaries. This leads to the first driver, which
segments, the business, public sector as well as citizens captures the influence of IT enabled transaction infra-
communities, and have provided an environment for further structures on innovative value propositions. Following the
diffusion and growth. functionalities of electronic market platforms (Bakos 1998,
35f; Giaglis et al. 2002, 233ff), the business models for
Electronic markets as governance mode electronic markets are manifold (e.g. Dai and Kauffman
2002) and include various sources of value as listed below.
While the predictions of Malone et al. (1987) may also be
applied to the broader economic development addressed in
• Message handling: Following the idea of clearing centers known
the previous section, they were specifically targeted at the
from the EDI field, the translation of message formats is still an
EMH, i.e. the comparative advantage of (electronic) market important function when messages are to be exchanged automati-
coordination over (electronic) hierarchies. There is ample cally between applications. Compared to the early offerings today’s
evidence of the ongoing extension of market coordination standards are based on XML subsets and also include the mapping
of activity chains. Using business process definitions from
(in the narrow sense, i.e. auctions, dynamic pricing
typically via centralized market platforms) into the elec- 1
The bid-ask spread reflects the value added by intermediaries and
tronic sphere. Technological advancements combined with consists of the costs of processing orders, holding inventory and
market entrepreneurship have driven an extension of adverse selection (Huang and Stoll 1997, 995f).
Twenty years of electronic markets research 45

Table 2 Examples of products

and services traded in electronic Trade objects Examples
markets
Commodities • Financial markets (e.g. Eurex, CME CBOT)
• Energy markets (e.g. European Energy Exchange EEX)
• Agriculture markets (e.g. CME Globex, The Seam)
• Computing markets (e.g. Grid computing)
Software • Web service directories (e.g. StrikeIron, RemoteMethods)
• App stores (e.g. Apple, Microsoft, Nokia)
Information • Geographic information (Brox and Kuhn 2001)
• Advertisement exchanges (e.g. Google Doubleclick)
Predictions • General events (e.g. Intrade)
• Political outcomes (e.g. Iowa Electronic Market)
• Video game sales (e.g. Simexchange)
Rights • Trading CO2 emission rights (e.g. European Union Emissions Trading Scheme)
Services • Personnel or freelancer services (crowdsourcing, human cloud, microwork)
• Maternity care auction (Smits and Janssen 2008)
• Logistics markets (e.g. inet-logistics, Axit, Gudmundsson and Walczuck 1999)
• Procurement platforms (e.g. Elemica, Supply On, cc hubwoo)
• Comparison sites (e.g. uswitch, comparethemarket, kelkoo, comparis)
• Auction sites (e.g. Ebay, Webstore, eBid)
• Retailing platforms (e.g. Amazon, Grainger, Zalando)
• Pooling sites (e.g. Groupon, Google Offers)

RosettaNet’s public-private processes, providers, such as GXS and participants. This comprises, for instance, the publication of demand
e2open offer message handling in the electronics industry. forecasts of large manufacturers with their suppliers or the
• Transaction execution, including trade context processes: Due to consolidation of status information to track physical goods.
their topological advantages, markets are valuable infrastructures for • Product innovation: The concept of crowdsourcing has
the facilitation of standardized transactions. As prominent examples, transformed research and development processes in several
Amazon and eBay provide professional services from the shopping industries. Business partners and sometimes even end customers
cart to logistics and payment, fraud detection and buyer protection. actively collaborated via one platform to develop a specific
Amazon even offers their services to competing third party providers product or service. For instance, the Innocentive platform is used
in the marketplace section and sells individual services as Amazon to develop, publish and evaluate ideas for new products or
Web Services. Redesignme.com consists of a community that helps in
• Market overview: The electronic market provides a structured view of redesigning products so that they become marketable.
the offerings in a market using a centralized directory, order book or
product catalog. Prominent examples are product catalogs in retailing
sites, comparison sites as well Web service directories (see Table 2).
Second, from the perspective of an electronic market
• Price discovery: Markets and in particular auctions offer dynamic
pricing employing a variety of mechanisms (e.g. Dutch or English
provider, there is competition between governance models,
auction, single or double auction) and are traditionally a powerful specifically markets and network arrangements. Moreover,
instrument when price determination is a problem. This is the case due marketplace intermediaries operate in an environment of
to abundant competition or a lack of competition in many commodity competition among marketplaces (e.g. Weitzman 2010), other
markets, e.g. for unique collectors’ items. Auction markets aim for an
improved allocation of resources and are also used for demand
intermediaries and direct sellers (for bypassing see e.g. Weber
pooling (see pooling sites in Table 2). Examples, such as the 1994). They face challenges, such as conflicting relationships,
maternity care auctions in the Netherlands, illustrate that auctions may partner resistance, as well as balancing the interests of trading
also lead to a restructuring of markets (Smits and Janssen 2008). partners. Their success seems not only contingent on the
• Customer decision support: Given the breadth and complexity of breadth of the offered services but also on governance and
products available online, intermediaries provide various forms of
customer decision support from recommender systems based on
ownership structures. Depending on various contingencies
individual customer profiles, the analysis of aggregate shopping (e.g. market transparency, market fragmentation) the elec-
patterns (collaborative filtering) or the inclusion of customer product tronic markets’ history has shown various opportunities for
reviews and ratings (user generated content). Reviews and ratings dis- and re-intermediation strategies (e.g. Giaglis et al. 2002).
are also offered to assess the quality of vendors (and customers).
When market power was combined with the development
• Information sharing: Transactions between businesses typically
require a broader set of information to coordinate activities. Platforms
and the operation of a market platform, these platforms were
for supply chain collaboration, such as GXS, GS1 or e2open support often rejected. This is in line with Malone et al.’s prediction
the exchange of planning and status information between many of a move from biased to unbiased markets.
46 R. Alt, S. Klein

Third, in the institutional design dimension, electronic first proposition argues that in view of vertical disintegra-
markets offer an institutionalized transaction environment. tion, flexible co-creation concepts and modularized service-
This includes regulatory functions, such as market access (e.g. oriented architectures, centralized platforms will receive a
requirements, registrations) and the availability of monitoring growing importance to coordinate economic activity.
and enforcement mechanisms (e.g. protection against insider
trading) as well as legal functions that determine contract law, Proposition 2: Increasingly complex value systems sustain
dispute resolution, and the transfer of property rights. the proliferation of electronic markets

If economic production relies increasingly on flexibly coordi-

Propositions for the future of electronic markets nating products and services, classical sequential value chains
will also become more complex. Figure 1 depicts electronic
Compared to a description of the value that has already become markets as nodes between multiple actors which transact
apparent in existing electronic markets, forecasting future within an institutional environment. While Fig. 1 suggests
sources of value for intermediaries is more difficult. In order to relatively simple transactions, the unbundling of products and
stimulate the discussion about future trends of electronic services requires multiple transactions (and markets) to
markets this position paper suggests six propositions. contract complex products or service bundles. This could
open up the possibilities for intermediaries that configure,
Proposition 1: Intermediated topologies of electronic offer and monitor solutions which comprise products from
markets reduce dependencies in value chains various providers as well as marketplaces. For example, some
services in the area of financial advisory already pursue a life
As mentioned above, electronic markets provide an cycle view of business relationships and create individual
infrastructure that aims at facilitating transactions between solutions from a broad range of services including checking
buyers and sellers. In most of today’s value chains, this accounts, financing and insurances. We envisage similar
takes place between various tiers, e.g. between end bundled services for mobility, computing services, indepen-
customers and distributors, between manufacturers and dent living in the third age and the like. This will also involve
their suppliers and so on. In such settings intermediated the extension of electronic markets in new domains, such as
(or centralized) topologies reduce the interface complexity maternity care, emission rights, and software apps (cf. Table 2).
from n * (n-1) to n * 2 connections. This also reduces the The transformative power was illustrated by successful
dependencies in value chains and thus the coordination markets, such as eBay or the Apple App Store (MacMillan
efforts.2 All examples listed in Table 2 are centralized 2009) which created new markets by crafting and enhancing
markets with a market provider acting as intermediary the rules and functionalities of their service. Like the first
between buyers and sellers. In principle, markets can also proposition, the second expects that the role of electronic
exist in a decentralized form, i.e. all actors interacting markets in the economic environment will increase. In
directly using standards, rules and plans which were addition, in the future we will see a more interwoven
previously agreed upon (e.g. within an industry). Since landscape of distributed and cascading electronic marketplaces
these reciprocal interdependencies require considerable with some markets acting as meta- or sub-markets.
standardization efforts and are prone to conflicts, central-
ized topologies feature pooled interdependencies which add Proposition 3: All-in-one marketplaces increasingly
structure to the transactions between the participants and combine various modes of governance
reduce the potential for conflict (Kumar and van Dissel
1996, 287). They are also advantageous compared to Early electronic markets, such as the auctions in financial
sequential interdependencies which are typically found in exchanges and the flight schedules as well as capacity
supply chains where each party forwards information to the management in the computerized reservation systems,
adjacent partner, but where an overall perspective is provided a limited set of coordination mechanisms. While
missing. The advantage of centralized electronic markets these systems are still operating successfully, electronic
is supported by empirical research which shows that the markets in other industries have combined several coordi-
number of messages required and the information quality in nation mechanisms as part of their business model.
a centralized market with a limited number of brokers is Examples, such as Elemica or e2open, illustrate extended
always superior to decentralized market designs and also transaction and life-cycle support beyond electronic auc-
hierarchies (Talalayevsky and Hershauer 1997). Thus, the tions. In fact, the three generic market functionalities yield a
variety of opportunities for market operators to add value
2
Coordination is the management of dependencies between activities within value chains. So-called “all-in-one-markets” (Kambil
(Malone and Crowston 1994, 90). et al. 1999) feature a variety of coordination mechanisms,
Twenty years of electronic markets research 47

Fig. 1 Electronic markets as

Institutional environment (e.g. legal system, industry specific conventions)
intermediaries in a supply chain

Institutional Institutional Institutional Institutional

setting setting setting setting

S C S C S C S C

Legend: Seller (S),Customer (C), ElectronicMarket ,Interactions/transactions ,Disintermediation

which link the possibility of competitive bidding to determine and secondary markets were created by intermediaries
a price and to keep the pressure of competition on the one (e.g. Priceline, Qfly). The future will also see a stronger
hand with the advantages of a predictable relationship to diffusion of flexible pricing in B2B electronic commerce
encourage relationship specific investments (non-contractible with innovations in differential pricing (in revenue man-
issues) and functionalities for closer collaboration (e.g. agement, procurement, and supply chain coordination), and
Markus and Christiaanse 2003) on the other. A combination mechanisms for the evaluation of complex and multi-
of market and hierarchical components (Holland and Lockett dimensional bids (Bichler et al. 2010). These features are
1997, 485) could either occur sequentially with the bilateral not “one time” innovations, but will require constant
execution of a number of transactions following after an reassessment and improvement. For example, market
auction was conducted or in a concurrent fashion where operators, such as eBay, are in a unique position to monitor
trading mechanisms are available on one platform. Examples auctioning behaviour and develop or adjust auction rules
for the latter are Click2Procure which is the buy-side and parameters. Over the years, eBay has become an
marketplace of Siemens AG in the B2B-domain and the innovator, introducing auction bots for automatic bidding,
well-known options from eBay in the B2C area (Hasker and refined review mechanisms for buyers and sellers in order
Sickles 2010, 10). Thus, the third proposition argues that the to ensure the fulfilment of the respective obligations
nodes shown in Fig. 1 will become more complex in (delivery of promised goods and payment) or seminars to
themselves by combining various modes of governance. teaching bidding behaviour. Phenomena like “sniping”,
bidding in the last seconds of an auction, show the
Proposition 4: Lower signalling cost shape new ingenuity and energy of bidders (Bapna 2003). eBay is
and improved market mechanisms probably also one of the largest market research sites as
they document all auctions and make anonymous auction
Electronic markets are at the heart of flexible pricing in data available for academic research. Amazon has already
many industries. Sophisticated solutions for flexible pricing made information from their platform part of their web
and price signalling have emerged, e.g. in the airline services offering (Alexa Web Information Service).
industry. As airlines’ capacity is fixed in the short term,
they have been using yield management techniques (price Proposition 5: Technological innovation in standards
differentiation) for years (e.g. Klein and Loebbecke 2003). and services will add value
In a period of intense competition from low cost carriers,
airlines use their Web sites to signal price variations for In addition to the industry- and business-oriented aspects of
different flights and also show the number of available seats the electronic markets’ evolution, IT-based innovations will
in a particular price category. While this does not offer continue as important enabler for electronic markets. On the
direct price negotiations, it allows passengers to pick flights one hand, service-oriented concepts require centralized
based on their price-time preferences and thereby contrib- platforms that support the publication, configuration, and
utes to a levelling of demand. A similar approach is management of services across multiple actors and systems.
pursued by utility companies. Based on demand predictions Among the solutions emerging in this domain are the
and smart metering,3 they are offering lower prices at times Universal Service Description Language (USDL), Univer-
of low demand. Even in an industry limited by legal sal Description and Discovery (UDDI) and the Business
constraints (e.g. Reimers 1995), market mechanisms prevail Process Modeling Notation (BPMN). Ultimately, they will
enable electronic marketplaces to become part of more
3
Supported by smart metering technology utility companies might complex value systems by facilitating a larger variety of
even control some equipment of companies or even households in
service configurations. On the other hand, cloud computing
order to generate demand for electricity in times of spare capacity (e.g.
to run the compressor of a refrigerator) or lower demand by taking has shown that most local applications may also be hosted
certain pieces of equipment off line. on external platforms. Combining the software-as-a-service
48 R. Alt, S. Klein

(SaaS) idea with the functionalities of application stores bypassing, conflicting relationships, partner resistance, balanc-
(from Apple, Nokia or others), electronic markets might ing the interests of trading partners. Success often seems not
become the operating system of many value chains. While only contingent on the breadth of services that they are
the business partners prefer standardized transactions and offering but also influenced by governance and ownership
will advocate shared conventions for processes, services structures. When market power was combined with the
and data, the market place providers—in particular first development and operation of a platform, these initiatives
movers—may prefer proprietary (back-end) solutions in were regularly rejected (e.g. Alt and Klein 1999). However,
order to achieve a competitive advantage over other deliberations about social, technical, economic, political and
providers. Thus, likely outcomes are technical configura- environmental issues are bound to fail if they neglect the
tions that combine standardized and proprietary elements. phenomenon of risk. As mentioned in the introductory
Second movers might emphasize standardization as a section, the financial crisis has highlighted the increasing
differentiating value proposition. exposure to risk that can easily and swiftly spread around the
globe. In view of the pervasiveness of electronic trading, it is
Proposition 6: Social networking will transform electronic difficult to clearly separate traditional and ICT related risks.
markets Beck (1992) has coined the notion of risk society to describe a
situation in which technical progress yields new risks, which
Finally, electronic markets will experience a revival of the absorb a growing amount of societies’ attention and problem
social. One of the major trends in recent years has been the rise solving capabilities. It seems that well known risks have
of social networking. In contrast to the commercialization of the become exacerbated and more contagious since they spread
Web and the anonymous logic of collaborative filtering, around the globe as easily as news or ideas.
individuals as citizens, consumers or other members of the First, the notion of infrastructure risks or cyber risks
society are trying to regain control. They use the Web-and more (Bremmer and Gordon 2011) highlights that communication
generally social media-for their private enterprises of socializ- networks have become vital infrastructures for the economy
ing, sharing, voicing their opinions etc. Recommendation sites and indeed the entire society. As communication infra-
(e.g. Rotten Tomatoes, iLike, Musicovery, Goodreads) and structures are available on an ubiquitous scale and mission
reputation management strategies will increasingly become critical for a fast growing number of domains, including
integrated in the market overview function and influence energy provision, healthcare, traffic control and commerce,
buying decisions. As mentioned, the strengths of markets lie societies’ dependence and vulnerabilities have dramatically
in efficient resource allocation based on price signals. While the increased. The temporary suspension of the EU Emissions
diffusion of IT has undoubtedly lead to more market and price Trading System on January 19, 2011 in response to recurrent
transparency globally, competitors drive each other to provide security breaches (European Commission 2011) is just one
price information or intermediaries have created a business example of the vulnerability of trading infrastructures.
based on product and price comparisons. Yet, markets generally Technical flaws have thus undermined what has been
and auctions specifically are social mechanisms to establish a carefully designed from a competitive and regulatory point
price (Smith 1990). The rise of social media and networking of view (European Commission 2010). Other examples are
(based on electronic communication) is a reminder that the cascading network risks in the globally distributed
individuals tend to make decisions based on opinions, production and supply chains: severe weather conditions,
recommendations and feedback by their friends and peer industrial action, disruptions caused by contagious diseases
group. in one part of the world can (and do) affect operations in
other parts-often within days.
Second, transaction and price risks emerge with the
Risks and sustainability of electronic markets dissemination of electronic markets (Clemons and Reddi
1994). The transformation from floor trading to electronic
Given the continued success and transformative power of trading has illustrated how trading was embedded in a broad
electronic markets, a key question remains: is this development range of social practices of monitoring and signalling
sustainable? First of all, the adoption of an electronic market in (Clemons and Weber 1997). Purely electronic modes of
its target community and the active participation of its members trading might yield new forms of risk and require new
are inherently linked to the market’s liquidity. Many market mechanisms of dealing with risk. To contain transaction and
initiatives were not successful in attracting a critical mass of price risk as well as uncertainty on the effects of ICT on
transaction volume and thus were discontinued. Research has industrial organization, Clemons (2007, 2) suggests to develop
shown that explanations are often not technological, but “enough pattern recognition skill to convert an unknown and
organizational and cultural in nature (e.g. Reimers 1995). As uncertain situation to a known and risky one”. One facet of
mentioned earlier, intermediaries face challenges, such as opportunism related risk has become more prevalent in the
Twenty years of electronic markets research 49

electronic marketspace: leakage of sensitive information. As participatory and deliberative approaches in order to
information can be copied and communicated at virtually no achieve better informed and more democratic decisions.
cost, the risk of massive and systematic leakages of trade If electronic markets incur new and extended risks, these
information has increased by an order of magnitude. risks need to be considered when discussing benefits and
Third, systemic risks are prevalent when electronic systems gains of electronic markets and should be internalized, i.e.
interact almost autonomously among each other. An early carried by those who participate and benefit from the
contribution in Electronic Markets has described the effects of markets. However, regulators are facing a dilemma between
communication speed and the stability of trading systems unnecessary administrative burdens caused by regulation
(Addor 1992). While Addor was expecting that the instanta- and the risk incurred as a result of insufficient regulation
neous communication of fluctuations in electronic markets and control. While “smarter” regulation may be called for,
would yield more stable markets, the opposite outcome is also the inherent limitations of setting productive rules in a
possible. There have been instances where automated trading global environment with regulatory competition and highly
lead to a downward spiral in financial markets. The intrans- mobile and resourceful actors need also to be acknowl-
parencies involved in program or algorithmic trading “have edged. The EU Emissions Trading System mentioned
overtaken the industry [… and] for better or worse, the above is an example for coordinated efforts to develop,
computers are now in control” (Salmon and Stokes 2010). amend and develop regulation for a young and dynamic
More recently, the problem of system critical companies market in light of ongoing economic and climate crisis as
received considerable attention. While innovation in the well as fraudulent actions.
electronic marketspace often sparks a virtuous cycle of
competitive countermoves, further innovation and productivity
growth (Farrell 2003), a few companies achieve a speed of Conclusions
growth and quasi-monopolistic market positions, which make
them—at least temporarily—system critical (too big to fail) Although the research field “electronic markets” has been a
within a relative short period of time (Johnson and Kwak topic of research in academia and practice for over two
2010). Such companies require specific regulatory responses, decades, the concept of electronic markets appears more
geared at the relative position of these companies in their relevant for today’s distributed and networked economic
respective market environments. Technology and market systems than ever. Starting from the available research in
forces alone do not seem to prevent the rise of biased markets. the electronic markets field, this position paper suggests an
Overall, the discussion of technology-induced risks on extension of the existing knowledge by proposing a multi-
electronic markets has been quite limited. The analysis of dimensional framework. Starting from the empirical diver-
the root causes of the financial crisis has yielded contro- sity of electronic markets, it argues that the design of
versial results: some argue that the markets in principle are electronic markets is not driven by cost-evaluations only. In
working, while others call for much stricter regulation. fact, it requires understanding the intricate relationships of
Whatever the final verdict may be, the crisis has highlight- technological potentials, market dynamics and the rules
ed the role of regulation for markets to function but also defined within the institutional environment. For that
that electronic trading is happening at a level which is purpose, it links micro layer phenomena, such as business
difficult to control: The financial services industry has model innovation with macro layer phenomena (transfor-
become a truly global industry with mind boggling volumes mation of market environments) and shows how techno-
of transactions if compared to the size of national budgets logical innovations, competitive dynamics and rule setting
or even gross national products. As a result many financial (from standardization to regulation) are linked and require
services institutions have become system critical to an realignment between individual incentives and the interests
extent that countries are risking bankruptcy in order to keep of the community. This also calls for distinct educational
individual banks alive. The regulatory side of providing and research efforts at a time, when most educational
incentives and safeguards for a sustainable and accountable institutions seem to be geared towards increasingly specific
development has not kept pace and in numerous instances micro analyses rather than taking a broader, systemic and
has failed dramatically. The balancing of risks and interdisciplinary perspective.
accountability did not work. A comparative study
(Bertelsmann Stiftung 2010) highlights the salience of Extension of electronic markets across all levels
institutional reforms and social governance, which have
helped in particular emerging economies to respond to the While pure play electronic market mechanisms seemed
crisis effectively. Flyvbjerg et al. (2003) in their study of limited to a small array of application areas, in particular the
risks related to infrastructure (mega) projects claim that computerized reservation systems in tourism, the exchanges
more accountability is needed to mitigate risks and in the financial sector and some examples of electronic
50 R. Alt, S. Klein

supermarkets in the retail sector, today’s picture of existing critical infrastructures, whose failure has massive economic
electronic markets features a much greater diversity of and social effects. The financial crisis is only a reminder of
application areas for electronic markets. More products and the fact that we have joined a global risk society. This
services have become tradable on electronic markets and position paper has argued that institutional design orientat-
innovative trading mechanisms have emerged. At the same ed by principles of good, social governance and account-
time, communication-rich environments have developed ability not only reduces transaction costs, but is crucial for a
which facilitate crowdsourcing for news, ratings, predictions, sustainable development. However, it also recognizes the
services or innovative ideas. Successful companies have learnt dynamic relationship between innovation and regulation.
how to mobilize, facilitate and benefit from social production. Regulation within the institutional environment and setting
Moreover, within the competitive ecosystem of market plat- of electronic markets assumes certain patterns of behavior
forms (Clemons and Woodard 2011), highly successful on behalf of the market participants. Examples, such as
electronic market platforms have emerged, such as eBay or “sniping”, illustrate that rules will be challenged by human
the Apple iTunes App Store, which have created new market creativity and inevitably yield unforeseen effects. Electronic
segments and spurred systems of innovation. markets need to adjust and, thus, require continuous
monitoring and improvement. Understanding these dynam-
Increasing complexity of market platforms ics of electronic markets becomes even more important in
view of more interconnections and the diffusion of
At the same time, the understanding of the phenomenon electronic agents. Thus, like for every powerful (techno-
“electronic market” has progressed. Where some isolated logical) concept, efforts are required to develop its
technologies were used to link businesses in the beginning, potentials and to contain risks at the same time.
today’s picture comprises a broad set of design options to
realize added value to market participants. Overall, the
complexity of electronic market architectures and gover-
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