Making Markets - Harvard Business School MBA Program

Making Markets

Course Number 1764

Professor Thomas R. Eisenmann
Associate Professor Scott Duke Kominers
Spring; Q3Q4; 3 credits
24 sessions
Paper

Markets are everywhere - and where they’re not, you can build them!

Career Focus

Over the past twenty years, entrepreneurs have created and captured enormous value by launching new marketplaces. Examples include Airbnb, Alibaba, ClassPass, Craigslist, eBay, eHarmony, Etsy, Gerson Lehrman Group, Google, IEX Group, Lending Club, Kickstarter, OpenTable, Rakuten, Uber, Upwork, and many more.

Making Markets (M²) is intended for students who want to manage in marketplace environments and remedy market failures by building new platforms and marketplaces from scratch or by redesigning existing ones - or who want to advise or invest in entrepreneurs who pursue such opportunities.

Educational Objectives

Students will learn how to identify market failures and determine when those failures create opportunities to launch or redesign marketplaces.

First, we will explore how markets function and what makes them fail. Next, we will examine how effective marketplace design-or redesign-can address market failures and improve efficiency, liquidity, and fairness. Then, we will take the entrepreneur’s perspective, studying the key barriers to organizing new marketplaces and devising strategies for overcoming them. Along the way, we will pay special attention to settings in which marketplaces create more value for transaction partners than relying only on unmediated exchanges. As we will see, marketplace design can often “square the circle,” solving seemingly intractable problems simply by reducing transaction costs or barriers to entry.

Case contexts will range from ultra-local (e.g., the HBS EC course lottery) to truly global (e.g., container shipping); will examine private and public/social enterprise settings; will profile both online and offline marketplaces; and will span all stages of marketplace launch and development.

Course Content

Through case studies, simulations, and the occasional interactive lecture, M² will examine the design, launch, and management of marketplaces and marketplace platforms. Core lessons include:

  • The Structure and Purposes of Markets: Markets create value by enabling parties to execute mutually beneficial transactions - exchanging goods, say, or sharing ideas. They are everywhere that transacting parties face incentives - from classic contexts like financial or product markets to dating, recruiting, and the sharing economy.

    Some markets are completely unstructured, but most are subject to at least some rules that shape participation. In this course, we will focus in particular on markets that are organized through marketplaces that combine rules for participation with infrastructure to facilitate interactions and transactions.

  • Common Sources of Market Failure: In many markets, institutional frictions combine with incentives to produce suboptimal outcomes - socially wasteful transactions occur, or productive ones do not. When such market failures occur, entrepreneurial opportunities arise: reshaping the market to improve efficiency creates value that can be captured(!).

    To understand how to fix markets, however, we must first understand how and why market failures occur. The course will classify different types of market failures, and highlight entrepreneurial responses to each.

  • Strategies for Launching and Managing Marketplaces: When launching a marketplace or other market intervention, it is essential to mobilize a critical mass of market participants so that there is enough liquidity for valuable transactions to occur. Once running, a marketplace must maintain balance between its supply and demand sides, or else participants may leave to transact elsewhere. Yet at the same time, marketplaces must avoid crowding that makes it hard for participants to find high-value transaction partners.

    The course will provide strategies for promoting participation and trust in marketplaces, especially early on. Then, we will learn techniques for growing marketplaces, and combating the problems that marketplaces face at scale, such as congestion, “unraveling” (e.g., when recruiters pressure candidates with early and exploding offers), and the risk of disintermediation.

  • Types of Marketplace Mechanisms: Markets work in many different ways. Some compel participants to seek out their own transaction partners; others use centralized transaction discovery and execution systems like auctions and recommendation algorithms. The mechanisms that a marketplace uses to identify and process transactions can be the difference between success and failure.

    Choosing among marketplace mechanisms requires careful attention to market participants’ needs and transaction attributes. The course will provide guidelines for adopting mechanisms best suited for different market contexts.

Final Project

Working alone or in pairs, students will write a short paper that:

  1. identifies a setting where market failures lead to shortfalls in value creation and/or capture, and
  2. proposes either a new marketplace or substantive improvements to the existing marketplace that would address those failures.