Online Market Makers: A study of what they do to reach critical mass

Sammanfattning: Online market makers bring together two or more distinct different parties to interact and transact with each other. By doing this, they either reduce search costs, shared transaction costs, or both. Reducing search costs reduces asymmetric information among users and makes sampling of candidates easier. Reducing shared transaction costs means making the transaction more flexible, less costly, and less time consuming. Previous research states that online market makers need to attract a critical mass of users for network effects to appear and help further growth. We find that online market makers do not view critical mass as is suggested by existing theory. Instead of viewing critical mass as a certain total number of users, they view as the sum of having reached critical mass in small geographical areas or social niches, i.e. the number of geographical or social communities that have been created. Hence, in the effort to create strong network effects, online market makers need to focus on building up many small communities. After critical mass is reached in one social or geographical niche, the online market maker should expand into adjacent niches, which starts creating network effects. As critical mass is reached in more social or geographical niches, network effects get stronger and people start to spread the word of the platform through word-of-mouth. When enough niches have reached critical mass, we propose that a general critical mass has been reached, which makes further expansion much easier.