How to Rank an E-Market

There are established tools to evaluate the effectiveness of any market for any resource. Applying them to online platforms reveals gaping disparities between exchanges serving the top of the economy and digitized markets available to regular people and local businesses.

1) Five factors on which to rank a market

Any forum enabling economic transactions should be judged on what it does for sellers (workers in the case of a labor market). If we think of any e-market broadly, as an appliance that matches sellers to their buyers, there are established criteria for assessing effectiveness. They get updated over time.

This analysis can be distilled into 5 factors:

2) E-markets are game-changers

The factors above for assessing a market remained abstract throughout history. Digitization has made them mundane in some parts of the economy.

In a world of physical trading it was never possible to assemble, as one example, all the buyers of cows and every bovine for sale in one place. Trying to include every animal, crop or machine farmers wanted to sell on any given day was a further step in inconceivability. Markets remained localized and specialized for centuries. Functions, overheads and governance varied widely between micro-exchanges.

Telegraphy and telephony moved the developed world towards deeper, broader, markets. Diversified buyers of agricultural output and equipment could now dial into auctions. They were buying blind, unable to see each lot, but wider, more liquid, markets put pressure on organizers to incrementally improve standards.

Online marketplaces finally made the 5 factors viable. That has been spectacularly demonstrated in one part of the economy. Starting in the 1990's international financiers used computerized tools to shape new markets for stocks, bonds and their other assets. Rating Wall Street's markets against the 5 factors is revealing:

Global finance was able to build such empowering markets thanks to two factors:

Readiness for computerization: Financial products are easily traded digitally. A sale just requires changing entries in a database ledger. There is none of the potential messiness of real-world transactions; workers who may not show up, or underperform if they do, for example.

Concentration of sellers: Big finance is dominated by a group of large players. They are both buyers and sellers and had the clout to, for example, force exchanges to become interoperable and fair to all users.

A new generation of hyper-effective exchanges has sucked capital out of the overhead-laden uncertainties of real-world investment into speculation. That has enriched Wall Street's sellers.

3) Pseudo-markets at the economic base

While Wall Street was transforming its earnings, economic activity for regular people and local businesses also moved onto digital platforms. They rank badly.

We will use Uber as an example, not because they're the worst market operator, only because their record-setting valuations made them a pathfinder for countless apps aiming to be "The Uber Of...." some sector of activity. It also exposed them to scrutiny. Other operators have been better able to keep their practices under-the-radar.

Assessing platforms that enable activity at the base of any economy's pyramid highlights how much they are not markets at all, just slick ordering systems. Take employee scheduling platforms as another example. They run a monopsony labor market for each customer; hundreds or thousands of staff hoping to get hours of work, just one, all-seeing, buyer. By definition a monopsony is bad at fostering fairness, depth or opportunity for sellers (workers).

Why have startups been able to grow such unhealthy "markets" across the base?

Complex transactions: Booking someone to drive you to the airport - as one example - contains multiple uncertainties (non-arrival, dangerous conduct, a breakdown). Starting activity in these forums is hard. It all made launching an exchange expensive and risky. Most fail. Venture capital has to be repaid by maximizing profitability of each platform that survives.

Atomized sellers: Workers and local businesses had none of the heft Wall Street sellers enjoy. If an app like Uber could attract demand, typically with price subsidies, someone wanting to sell taxi rides would find they needed to come across to the new channel. Fungible and high-churn, workers remain virtually powerless to shape these platforms. The same is true of businesses like food takeaways finding themselves at the mercy of delivery apps.

4) Closing the gap

Markets matter. They allocate resources, set prices, create winners and can throttle opportunity. Markets for labor, services, goods, finance and content across the base have more complex characteristics than Wall Street trading. But that's no reason we can't have the choice of markets with the 5 factors.

Government, and a range of groups battle with companies like Uber to try to curb their abuse of sellers/workers. Read about those efforts here. But curbing egregious mistreatment is a low bar for our expectations of such potent technologies. It is worth understanding what they could be doing if focused on growth, inclusion, resource efficiency, national advantage and maximizing economic opportunity.

NEXT: The Untapped Potential of Horizontal E-Markets