Why do marketplaces exist?
Marketplaces exist because they are an improvement over the alternative. If you can imagine, the alternative would be salesmen yelling aimlessly for buyers, and buyers potentially doing the same as they look for viable sellers. Whether in person or online, this situation would quickly devolve into chaos with buyers and sellers indiscriminately yelling for each other.
As an improvement over this chaos, marketplaces naturally form around large buyers and sellers of distinct goods and services. This generally happens because the larger buyers and sellers soon form reputations as such, and participants on the other end know that they can find their good, service, or buyer in one place. Other buyers and sellers who have not built their reputation as powerful participants can tag along with those who have and will benefit from the uptick in traffic and interest that the bigger buyers and sellers receive.
Why do participants pay fees?
Sellers pay fees because it’s cheaper for them to pay to access a large pool of buyers than it would be for them to hire salespeople to go find them individually. Buyers pay fees (though possibly indirectly) because it’s cheaper to pay the fee than it is to find and vet individual sellers they can trust.
Why do marketplaces charge fees?
Marketplaces charge fees because they can. The business school answer might go something along the lines of “marketplaces charge fees to recoup the risk shareholders took to invest in the establishment of the marketplace and to fund the continued protection of marketplace participants.” While this more verbose explanation is true, it’s probably better to remember the level of fees basically takes into account:
a) how valuable the marketplace is to the participants,\ b) how many other options they have for exchanging their goods and services, and\ c) the switching costs participants must undertake to move their good or service to a new platform.
Internet marketplaces V1
If we can put ourselves back into our 1997 mindsets (for readers under the legal drinking age, please forgive me), we can remember how scary it was to fathom buying something on the internet. “Who is on the other end? Will they steal my personal information? Will I even get what I paid for?” were all common and reasonable questions at the time. Internet bears were not wrong for identifying these risks. They were wrong for mispredicting the profitability and technical feasibility of minimizing these risks.
With the emergence of PayPal, buyers could feel some degree of comfort surrounding the latter two fears, and it turned out that the buyers don’t care too much who is on the other end, so long as they are honest. Marketplaces like eBay, Amazon, and StubHub popped up in Web 1.0 and were followed by more unique offerings like Uber and Airbnb in Web 2.0.
