Executive Summary:
The Next Leap Forward in Online Marketplaces
Online marketplaces were supposed to be the next big leap forward in creating new horizons for commerce and in gaining the market efficiencies that technology could provide. However, these ‘marketplaces of the future’ did not materialize as expected; many start-ups offering exchanges for buyers and sellers failed. Lack of liquidity, lack of privacy, and/or unfair information advantages of the owner of the marketplace have deterred participation. In “Design of Robust Business-to-Business Electronic Marketplaces with Guaranteed Privacy,” Professor Amit Basu, Chair of Information Technology, and Professor Joakim Kalvenes of SMUCox offer an innovative approach to designing an electronic marketplace (EM) with privacy, which can broaden the potential use and viability of business-to-business online marketplaces. According to Basu, “If this model had been in existence, Google could have had its IPO on online auction markets owned by competing firms such as Yahoo and eBay.”
The Unbiased Electronic Marketplace
There are basically two kinds of online marketplaces. One type operates such as eBay, an online auction where the owner/operator has little to gain in exploiting the information of its participants; these are considered pure-play marketplaces. Most business-to-business pure-play marketplaces have had difficulties surviving, due to the lack of deep pockets to buffer the nascent, early stages and an inability to attract buyers and sellers in sufficient numbers. The other type is principal-owned and operated such as a large firm like General Electric with its TPN online marketplace. This type of EM operator can bring significant transaction volume to the marketplace, thus providing liquidity as in a stock market. But other traders in this business-to-business (B2B) forum often balk at the unfair advantage the owner has with respect to access of information. Basu commented, “This research offers a way that General Motors, for example, could operate a marketplace (even as an owner) that would not give it an unfair information advantage. Essentially, our model would encourage the expansion of online marketplaces, and make principal-owned marketplaces feasible by supporting the dual goals of privacy and a level playing field.”
This research offers a robust technical basis for developing unbiased online marketplaces. To deter market opportunism, the approach includes mechanisms to reveal fraudulent traders and impart penalties for this behavior as determined by the operator. Basu explained, “The process for revealing fraud is robust but somewhat expensive. Businesses can be held liable for larger sums, thus making the stakes too high for cheating.” Basu commented, “This model was mainly designed for the B2B environment as the amounts of trade are significantly higher than say, a consumer market.”
Private Transactions in Marketplaces
In the world of electronic marketplaces, privacy and fraud are chief concerns which have limited the participation and thus expansion of EMs. In this model, Basu and Kalvenes separate privacy control from the other services provided by the EM operator. The locus of control over identity information is shifted completely to each individual trader (see Figure 1 in paper). The value proposition of the EM operator is to offer a full complement of trade process support while avoiding potential process losses as a result of trader lack of trust in the EM operator’s ability or willingness to preserve their privacy. “We provide protocols or rules that can be used to build software that would allow buyers and sellers to trade in the EM with privacy, keeping them anonymous to other parties,” commented Basu.
In the research, the major steps are identified and detailed that participants in an online B2B EM would undertake in conducting online transactions, and the trade processes are mapped into these steps. The role of privacy is discussed in each of these steps. The relevant tradeoffs are examined for both traders and the EM operator, with the advantages and disadvantages of privacy highlighted during any of the steps in the trading process. In some instances, it is desirable for a trader to keep its identity hidden from the EM operator and the other party to the transaction. On the other hand, process losses due to retention of absolute anonymity include increased transaction costs, lack of reputation benefits, and loss of coordination and relationship benefits. Basu and Kalvenes offer great detail with the issues of privacy as well as the ways in which transaction-related information may be managed and used.
The key feature of this market model is that the traders themselves control their level of privacy, transaction by transaction. Furthermore, identity information revealed in one trade does not carry over to other transactions unless the trader involved chooses to do so, and a trader’s identity is revealed only if the trader so chooses. Similarly, the EM operator is able to combine support for robust transactional and informational services with the ability to give traders the flexibility to set their privacy preferences as they see fit. This combination of features is unsupported by any existing EM.
The proposed design supports the usual transaction-time trade processes of search, authentication (identity and quality), valuation, payment and logistics, as well as the supporting processes of after-sales service, returns, dispute resolution and regulatory reporting. Furthermore, the design is robust with respect to the integrity of the trade process and the preservation of trader privacy under reasonable assumptions about trustee, EM operator, trader and agent behavior. Finally, the overhead of trader privacy provision is mostly associated with offline registration and dispute resolution procedures.
Conclusion
From a practical standpoint, this work has important implications for the design of online marketplaces. On the one hand, it allows pure-play EM operators to offer marketplace services with a much higher assurance of privacy without any loss of accountability. Given the significant concerns that most organizations and individuals have about conducting business over open networks, this may help make pure-play electronic B2B marketplaces much more attractive. On the other hand, this approach also makes it much more feasible for principal-owned trading systems to be transformed into full-fledged marketplaces. For instance, a large company that has invested significant resources in building a proprietary Internet portal to manage its supply and distribution chain could convert the portal into a many-many online marketplace. Even its competitors would be able to participate in such a marketplace confidently, knowing that their private transaction behavior could not be exploited by the EM operator. Additionally, the proposed design can be extended in several ways.
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