Etsy, the online marketplace for artisanal crafts, went public today. It’s a special day for the thousands of small businesses who rely on it for the sales of their handmade goods.
This is also a special moment for marketplaces as a business model. Here are three things that have facilitated their proliferation over the last few years.
The convergence of identities. Marketplaces require users to link their social networks up to their accounts in order to verify their identity. This validation doesn’t only ensure user authenticity, it also aligns our online behavior to our reputations, something we hold very dearly.
A marketplace’s success requires honest buyers and sellers with upstanding reputations.
The death of asymmetric information. Thanks to the troves of readily available data, moral hazard, the the tendency of a better informed party to exploit its information advantage in an undesirable or dishonest way, is reduced. [1]
Moreover, marketplaces encourage accuracy because accuracy increases the probability of a transaction, and thus, returning users.
Accuracy comes through transparency, the main ingredient of a successful marketplace. Neither party will get the results it wants with incomplete or misleading information.
The faith in the aggregate. National survey data reveals that trust in America has hit a 40 year low. So why do we trust strangers in this sharing economy (e.g. riding in an Uber or renting on Airbnb)? The answer is reputation crowdsourcing. [2]
Marketplaces aggregate the input of many individuals to form a trust score that can’t compare to just a few individual reviews. Consumers, especially millennials, are much more trusting of these collective reviews.
These are three developments that have made online marketplaces successful. What other trends contribute to their success?