Marketplaces or Web Services? Alternate Business Models for Electronic B2B Transactions Byungjoon Yoo Seoul National University byoo@snu.ac.kr Vidyanand Choudhary University of California, Irvine veecee@uci.edu Tridas Mukhopadhyay Carnegie Mellon University tridas@andrew.cmu.edu Abstract There are two popular forms of B2B marketplaces: public marketplaces and private channels based on web services. We study why firms choose either or both of these B2B channels. Using a real-options framework, we explain firms’ choice of B2B channels as a hedging strategy and as a method of obtaining greater managerial flexibility for the future. We show that uncertainty can precipitate the creation of public marketplaces. The level of information technology (IT) capability and spending is an important factor in firms’ decision-making. When a firm chooses its level of IT investment simultaneously with the decision about which B2B channel(s) to use, the firm that chooses both channels selects the highest level of IT capability and the firm that implements only the private channel selects the lowest level of IT capability. We also show that risk aversion in a firm offsets the preference for using public marketplaces. 1. Introduction The recent competition between HD-DVD and Blu- ray illustrates the uncertain evolution of technological standards. Firms in different industries had to decide whether to support Blu-ray or HD-DVD, or both or neither. Content producers such as Warner Brothers and Universal Studios, retailers such as Wal-mart and Amazon, video rental stores such as Blockbuster and Hollywood Video, and technology companies such as Apple and Toshiba were forced to take a stand on competing standards. Firms have to make similar decisions under uncertainty in many different contexts. In this paper we analyze the choices available to firms engaged in Business to Business (B2B) e-commerce using a real-options approach. We study the impact of several factors, such as the size of the firm, its information technology (IT) capability, the specificity of the product, and the effect of being able to customize processes on the firm’s choice of a web services–enabled private channel or a public B2B channel, or both. B2B markets have become increasingly important, with firms focusing on their core competency and outsourcing non-strategic parts of their business. The revenue from B2B electronic commerce is expected to grow from $9.5 trillion in 2007 to $15 trillion in 2010. [16] B2B marketplaces facilitate the meeting of buyers and suppliers and provide infrastructure for B2B transactions. However, the uncertainties associated with B2B marketplaces are similar to those with B2C (Business to Consumer) electronic commerce in 1990s. Of the 1,500 marketplaces that existed in 2000, only about 200 marketplaces survived in 2008.[16] Electronic B2B channels can be categorized into two types: public marketplaces and private channels based on web services. A private web service is owned by one firm and used only by that firm and its partners. A public marketplace is owned by many firms and used by them and their partners. While public marketplaces allow firms to save on procurement costs by drawing on a larger base of suppliers and buyers, the strength of the private web service channel is the efficiency of customized transaction processes for only one supplier or buyer. This study seeks to analyze the effect of various factors that influence a firm’s choice between joining a public marketplace and creating a private web services channel. Thus the present study contributes to our understanding of B2B marketplace adoption. We develop a framework for understanding a firms’ decision to adopt a B2B marketplace by combining game-theoretic analysis with a real-options approach. We find that firms with higher IT capability make greater use of both public marketplaces and private web services and firms that make use of both kinds of channels invest more in IT. When the level of IT capability is chosen simultaneously with the decision on B2B channels, the firm that chooses to implement both channels selects the highest level of IT capability and the firm that implements only the private channel selects the lowest level of IT capability. We also show Proceedings of the 44th Hawaii International Conference on System Sciences - 2011 1 1530-1605/11 $26.00 © 2011 IEEE