A Theory of B2b Exchange Formation

36 Pages Posted: 12 Jun 2002

See all articles by Hideo Owan

Hideo Owan

University of Tokyo

Jackson A. Nickerson

Washington University in St. Louis - John M. Olin Business School

Date Written: June 5, 2002


The recent explosion of attempts to form B2B exchanges and the large failure rate of these attempts raise questions about when and why B2B exchange formation succeeds. Our model provides a theory of B2B exchange formation by investigating conditions under which B2B exchanges attract enough buyers and suppliers to form. Our most important result is that, when the number of potential suppliers is large enough, successful formation of a B2B exchange hinges on its ability to subsidize suppliers selectively. Since there are externalities among participation decisions, charging the marginal cost of connection does not lead to the efficient outcome. Offering a subsidy to a selective group of suppliers is to "divide and conquer" them to induce full participation. Selective subsidy is also necessary to insure that the optimal number of suppliers join the exchange. When such subsidy is feasible, the full participation equilibrium becomes the unique subgame-perfect Nash equilibrium. The theory also yields implications for the ownership structure needed to support B2B exchange formation.

JEL Classification: L0, M2

Suggested Citation

Owan, Hideo and Nickerson, Jackson A., A Theory of B2b Exchange Formation (June 5, 2002). Available at SSRN: https://ssrn.com/abstract=315121 or http://dx.doi.org/10.2139/ssrn.315121

Hideo Owan (Contact Author)

University of Tokyo ( email )

Hongo 7-3-1
Tokyo, TOKYO 113-0033

Jackson A. Nickerson

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6366 (Phone)
314-935-6359 (Fax)

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