Understanding Shared Marketplace Economy: What’s, Whys and Hows
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Peer-to-peer or shared marketplace is a constantly evolving vertical. Shared marketplace economy leverages technology to exchanges services between consumers Going by the name, Shared Marketplace is where several people utilize a single item or service, however, it will be unjust to its explanation if we only go by its name. This is a constantly evolving vertical where broadly speaking, a Shared marketplace economy leverages technology to match two or groups of individuals to exchange goods and services on mutually agreeable terms.
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However, in the view of an ever-evolving sharing economy, let’s try to define exactly what the sharing economy is, “It is an economic principle that is constantly evolving. It facilitates the exchange of products and services among multiple stakeholders through technology”.
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Characteristics of Shared Marketplace Economy
The peer-to-peer market or Shared Marketplace economy is characterized by a high degree of heterogeneity. On one hand, buyers may be interested in specific products or services, and on the other hand, sellers may vary. This, in turn, creates a problem of matching appropriate buyers and sellers and figuring out personalized prices.
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Hence an effective market must aggregate information successfully keeping the transaction costs minimum. Furthermore, it must reduce the time to sort through options and communicate the appropriate information.
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1. Keeping transactions costs low and using information efficiently.
One solution for matching buyers and sellers is to centralize the process. This strategy is followed by on-demand services such as Uber. Whenever customers look for a ride, they only have to specify the type of service they want (e.g., a Black Car or an SUV) but not the specific driver. However, on the other hand, drivers receive a request and they can either choose to accept or decline. They are not shown where the rider wants to go. In this way, centralization keeps transaction costs for riders and drivers low.
Contrary to centralized systems, decentralized markets facilitate individual product choices. This market has diverse sellers presenting their wide range of available products and services. In such a market, creating streamlined and informative search processes becomes a challenge. Often the process begins with buyers specifying what they want. As they specify, relevant search results appear before them. This can be straightforward in some cases.
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Any buyer searching for a used textbook on Amazon probably expects to get it quickly, reliably, inexpensively, and in good condition. Since Amazon has lots of data about customer behavior, it quickly displays all the information contextually. In contrast, buyers looking for a weekend apartment in Barcelona may prefer different neighborhoods and different types of apartments.
Airbnb too presents buyers with an initial set of options. But it also provides the flexibility to arrive at the desired result by applying multiple filters. For instance, it narrows down the location, apartment type, or price range.
2. Presentation of Search Results in shared marketplaces
The presentation of search results matters a great deal. Even where it seems as if buyers should be able to browse easily through multiple listings. In search advertising, buyers are about twice as likely to click a listing on the top position as they would be if it were moved one position down. The advertising markets run by Google and Facebook are prime examples of this. Whenever there is an opportunity to show an advertisement, they run spot auctions to allocate the opportunity. Users get what they want to see. Whereas advertisers submit bids targeted to certain keywords or demographics or browsing histories.
Relevance based Search Score:
Rankings based on a “relevance score” and a multistage search process works fairly on eBay under alternative search designs. In this process, the buyer first chooses the exact product and then sees sellers ranked by price. Guiding buyers toward a price ranking can lead to a higher surplus. This happens only when the relevant product is clearly defined with few variants.
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Another search friction in Airbnb’s more complex apartment rental market is that even after buyers identify apartments of interest, many transactions fall through. Transactions can fail because the seller rejects the buyer. Or it may be because multiple buyers contact the seller at the same time. This congestion problem is also common in the Upwork online labor market. It results in part from showing buyers similar seller rankings in a setting where sellers have limited capacity.
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3. Dynamic Pricing for shared marketplaces
Auction Based Business Models
The Internet enables peer-to-peer markets to use a wide array of different pricing mechanisms. eBay introduced the use of proxy bidding, which enabled dynamic auctions to run over a period of days without buyers being attentive at every minute.
Prosper, a peer-to-peer lending platform introduced an auction model where borrowers posted a maximum interest rate they were willing to pay, and lenders, in turn, were able to make offers at lower rates. Similarly, Online labor platforms such as Upwork allow buyers to post jobs and invite bids from potential suppliers. The Internet advertising markets run by Google, Facebook, and other firms also rely on spot auctions.
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Contingent pricing based business Models
Contingent pricing-based models don’t require an auction. Airbnb, Etsy, and Amazon empower sellers to adjust the pricing in real-time, alternatively, it can be done through automated algorithms.
Nowadays peer-to-peer lending platforms use a proprietary algorithm to assess the riskiness of each potential borrower and set interest rates based on this score. Uber’s surge-pricing algorithm shows varied pricing of a ride as supply and demand conditions change. Hence in the contingent pricing-based business models, information collected and processed by the platform substitutes for the price-discovery benefit of an auction mechanism.
As a result, buyers quickly arrive at their preferences once they see different options. In practice, i.e. these business models create value through offering recommendations with a very high propensity for buyers to convert once they see desirable products. The key behind these valued recommendations is the heaps of buyer purchase history for example Amazon’s “people who bought X also bought Y” and user feedback reviews in the case of Netflix.
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Sellers tend to use auctions for used goods or when they have less selling experience. More surprising is the fact that auctions have been in steady decline for more than a decade.
When eBay started, it was not obvious that people would send money to nearly anonymous sellers or that these sellers would reciprocate by sending the promised items. Similarly, one might doubt that people would repay peer-to-peer loans, hire babysitters on the strength of a few online reviews, or rent rooms in their house to lightly vetted strangers. Yet all of these transactions seem to be workable.