Electronic and Physical Market Channels: A Multi-Year Investigation in a Market for Products of Uncertain Quality

Abstract

Many markets that have traditionally relied upon collocation of buyers, sellers, and products have introduced electronic channels. Although these electronic channels may provide benefits to buyers and sellers by lowering the transaction costs of participating in the market, there are trade-offs related to quality uncertainty and increased risk that may limit the adoption of the electronic channels. As a result, buyers and sellers use physical channels for some transactions and electronic channels for others. These usage patterns may evolve over time, particularly when the electronic channels are new. We examine buyer and seller use of electronic and physical channels in a market for products of uncertain quality (used vehicles) over a 2.5 year period. Results indicate that transactions involving low quality uncertainty and relatively rare products occurred in the electronic channels, while transactions involving high quality uncertainty and relatively plentiful products occurred in the physical channels. These patterns became clearer over time as buyers and sellers gained experience with the electronic channels. The electronic channels led to discounts for products of high quality uncertainty, but not for those of low quality uncertainty.

Keywords: physical markets, electronic markets, market mechanisms, business-to-business auctions, quality uncertainty, adverse selection, market design, transaction costs, search costs, change over time