Two-sided market network externalities in the Indian ecommerce industry

Abstract

Rising broadband penetration, ubiquitous mobile telephony, in addition to the existence of a secure payments environment are enabling growths of ecommerce in India, where more and more people are opting for online payments when the option is available. This has led to a surge in the number of ecommerce companies (or platform intermediaries) that connect the buyers to the sellers of a product or service. The traditional brick and mortar intermediaries integrated several complementary functions. On the one hand, they provided various types of information related to the product (e.g., availability, characteristics, price, location as well as value added functions such as after-sales services). On the other hand, they also provided facilities for the exchange of product (transportation, storage, display etc). With the emergence of ecommerce, there is an unprecedented separation between the above two functions due to the drastic reductions in the cost of information processing. The intermediaries serve two important roles – putting potential trading partners into contact and providing each side with information regarding the other side. In the first role, the clients of the intermediary value the breadth and depth of the services offered by the intermediary. E.g., higher number of sellers implies higher probability of the prices being low, and also higher number of buyers implies a higher probability that the supplier’s goods are valued highly. Thus, network effects arise for both sides of the intermediary. This study explores the existence of such network effects in two-sided markets and examines further the role of the intermediary in handling the relationship between different groups of buyers and sellers in the context of the Indian e-commerce industry.