Marketplace Design - Thickness, Congestion, and Safety

For marketplaces to work, they need to be thick, uncongested, and safe.

The Big Idea

Marketplaces are all around us. Every time you buy shoes, take a Lyft, go on a date, hire for a job, or see an ad online, you’re participating in a marketplace. Some marketplaces are extremely hard to get right: allocating spectrum, donating organs when you’re not a match with the organic recipient, and matching doctors to hospitals are examples of where complexity or special constraints make the matching process hard.

When markets don’t work well, you get a market failure. Some of these failures include:

  • There aren’t enough market participants. If you want to buy something and can’t find a seller, or if you want to sell something and can’t find a buyer, the market isn’t meeting your needs. Some markets may have one kind of market participant (for instance, single-gender dating), and others may have many (for instance, DoorDash matching drivers, restaurants, and patrons).
  • The market doesn’t adjust to spikes in supply or demand quickly enough. If a large concert lets out and nobody can get a Lyft, the market has failed because it couldn’t adapt to the spike in demand.
  • It’s easy to game the system, or you’re better off transacting off-marketplace. If there is a sentiment that only cheaters prosper, or that you’d be better off transacting off-marketplace, the market fails.

The Heuristic

Successful marketplaces are thick, uncongested, and safe. Buyers and sellers can find each other; the market adjusts to sudden spikes of supply or demand; and gaming the system is perceived to be hard or not worth it.

Per Al Roth, for marketplaces to work well, they must:

  1. provide thickness—that is, they need to attract a sufficient proportion of potential market participants to come together ready to transact with one another.
  1. overcome the congestion that thickness can bring, by providing enough time, or by making transactions fast enough, so that market participants can consider enough alternative possible transactions to arrive at satisfactory ones.
  1. make it safe to participate in the market as simply as possible a. as opposed to transacting outside of the marketplace, or b. as opposed to engaging in strategic behavior that reduces overall welfare.

Where You Can Use It

If you’re buiding a marketplace, you can build metrics around each of these dimensions and work to improve them.

(Per Tom Eisenmann)[], you can improve thickness by focusing on marquee customers and subsidizing price- or quality-sensitive customers.

You can reduce the congestion of markets by tracking and optimizing latency of transactions, especially in instances where supply or demand grow quickly. Accurate forecasting where possible helps.

Finally, you can improve safety by identifying and neutralizing the benefits of bad behavior. For instance, fraud is a major safety problem in markets for watches and shoes. That’s why (GOAT)[] and (eBay)[] both offer authenticity guarantees that that makes it more attractive to trade through than than through Craigslist. These guarantees are expensive, but also justify the margin these platforms capture.