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Adoption dynamics in buyer-side exchanges

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The purpose of this paper is to understand buyer/seller adoption dynamics in independent, buyer-side B2B exchanges. In a stylized model, the authors assume that the main role of the exchange is to reduce search costs for buyers. Buyers and sellers enter or exit the exchange based on the relative economic surplus (loss) they receive inside vs. outside the exchange. The authors contrast two situations: one where participants' switching cost to join the institution is negligible and another, in which it is significant. In an extension, they also explore the impact of buyer/seller heterogeneity on adoption dynamics. They have three key findings with relevant implications for practice. First, they find that the general view that demand and supply (so-called "liquidity") either grows or shrinks in the marketplace may not hold. In the presence of switching costs, the exchange can be stable with only partial market participation. Second, their results suggest that the exchange is better off subsidizing buyers as opposed to sellers in order to achieve the so-called "critical mass", beyond which there is full participation. Finally, they find that while in general, "minor" buyers of the industry have more incentive joining the exchange, when the fixed participation fee of the exchange is high, it is "major" buyers who are likely to join first. For sellers, this is not the case: minor sellers are always more keen in participating in a buyer-side exchange.

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