thoughts on shopping systems

A system with one seller and many buyers is called a shop (or an auction if only one good is being sold). When many shops are brought together, the resulting system is called an aggregator (or an auction house). If sellers can become buyers too, then it becomes a marketplace.

If seller side is closed to new entrants (which is always the case in the physical world), then what you have is something like a shopping mall. (Openness creates discoverability problems for sellers who are always willing to pay a rent for compensating the costs of maintaining a closure.)

If buyer side is closed to new entrants, then what you have is something like a shopping club. (Sellers will be willing to offer discounts to have access to such closed-off demand sources.) Shopping clubs collapse if the number of sellers is increased over time and sellers are essentially left competing as in an open system. This sooner or later happens due to competition among shopping clubs who feel pressurized to hunt for more customers and flex their closures. Of course, the irony is that when a shopping club is truly successful and every buyer and seller is in it, then it becomes the whole economy and paying a cut to the club becomes pointless for both buyers and sellers. 

Groupon tried to circumvent this fate by concentrating the demand and spacing sellers across time in return for a deep discount from each seller. It tried to achieve the paradoxical goal of having seller variety without seller competition. Since Groupon buyers moved from deal to deal and had very little loyalty, the time dimension got behaviorally collapsed and sellers again ended up competing with each other.

Groupon could eventually be brought down to its knees (by the sellers who understood what was going on) because it did not appeal to all potential buyers. (A lot of people want to be able choose from a wide variety of options rather than being dictated to a few randomly fluctuating options.) In other words, sellers had something to fall back on.

Amazon on the other hand can only be brought down by regulators because it appeals to all potential buyers. Sellers have nothing to fall back on. (Amazon does not demand a discount from sellers but exposes them to intense competition, which at the end of the day amounts to a not-as-deep-but-a-more-permanent form of discount.)

Some further thoughts:

• Only oligopolistic markets will be able to resist Amazon which started off by killing the competitive bookstore market. By becoming literally the only bookstore in town, Amazon now faces a strong resistance from a coordinating set of publishers from whom it now wants to buy directly. It can either buy its way up the supply chain or become a publisher itself like Netflix did. Former strategy will be expensive since publishers selling their businesses will be asking for very high premiums for defecting and will make Amazon pay the present value of all their future fat profit margins. Latter strategy is tough because of the same reason why Spotify will eventually fail: Creating a music star (similarly a bestselling author) is a much more complicated process then creating a hit movie. (Spotify’s profit margin is tiny compared to that of music producers and it does not seem to scale neither.) Talent discovery is stochastic and talent nurturing is difficult, and neither scales well. (Also there is a lot of consumption of old songs and books - which is not true for movies. So the incumbent producers with deep archives have a competitive advantage.)
• It is easier to sustain a shopping club in a physical environment where one can maintain a locally acceptable level of competition among the club-member sellers by sampling across all shopping malls. (In a virtual environment, there are no distances and competition is always a click away.) That is why shopping clubs usually end up housing only non-virtualizable experience goods like dinners in fancy restaurants etc.
• In a physical marketplace, buyers can not hide. A carpet seller in a bazaar can grab you by the arm and drag you to his store. In a virtual marketplace, on the other hand, all he can do is to harass you with the cooperation of the marketplace itself by using the allowed advertisement mechanisms. So, in some sense, you forfeit your right to be protected from harassment to the marketplace in return for the promise to build some norms and predictability.