Essay about The Emerging Role of Electronic Markets

5149 Words Nov 28th, 2010 21 Pages
I n t e r n e t

E c o n o m i c s

Internet-based electronic marketplaces leverage information technology to match buyers and sellers with increased effectiveness and lower transaction costs, leading to more efficient, “friction-free” markets.

The Emerging Role of

Electronic Marketplaces on the Internet
Markets play a central role in the economy, facilitating the

Yannis Bakos

exchange of information, goods, services, and payments. In the process, they create economic value for buyers, sellers, market

intermediaries, and for society at large. Recent years have seen a dramatic increase in the role of information technology in markets, both in traditional markets, and in the emergence of electronic marketplaces, such as
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Typically, sellers exploit these search costs by raising their prices, and thus enjoy higher profits. Similarly sellers may face search costs in locating qualified buyers for their products, such as market research, advertising and sales calls. A key function of markets in our economic system is price discovery, which is the process of determining the prices at which demand and supply “clear” and trade occurs. For certain markets, such as financial markets, this is their primary function. Markets can employ a number of mechanisms for price discovery.
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August 1998/Vol. 41, No. 8 COMMUNICATIONS OF THE ACM

For instance, some financial markets use one or more of the several types of auctions to determine prices, such as the “call market” auction at the opening of a trading day at the New York Stock Exchange, when bids are accepted up to a certain time and exchange occurs when the market opens. This is the first price that is communicated via the stock market ticker to the market at large, kicking off a day of “continuous market” trading. Other markets, such as the traditional automobile dealership, employ negotiation between buyers and sellers until a price is reached. In still other markets, such as the typical department store, merchants make firm offers that customers can either take or leave. Facilitation of Transactions. The matching function of a market establishes a bilateral relationship between a buyer and a seller.

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