Background Note | HBS Case Collection | December 2000

Online Market Makers

by Thomas R. Eisenmann and Chris Hackett

Abstract

Describes the business model for online market makers, firms that use the Internet to organize a marketplace, providing participants with a virtual "place" to trade, rules to govern their exchanges, and infrastructure to support trading. First it proposes a definition of market making and presents different ways to categorize online market makers. Next it describes how online market makers create value for market participants. Then it examines the economics of market making, focusing on revenue and cost drivers, using both online and offline examples. Building on that analysis, the final section examines the risks and potential payoffs to online market makers from pursuing aggressive growth strategies. Explores the value proposition offered by these companies and the economic imperatives they face. Finally, seeks to provide a framework for evaluating whether the adoption of aggressive growth strategies is prudent for online market makers.

Keywords: Business Model; Web Services Industry;

Citation:

Eisenmann, Thomas R., and Chris Hackett. "Online Market Makers." Harvard Business School Background Note 801-308, December 2000.