Issue 1, 2008

Zenkevich N. A. Comparative Analysis of Deal-Formation Mechanisms for a B2B Exchange

The intermediary role of a B2B exchange is modeled by using the principal-agent paradigm. As the principal, the exchange specifies the trading mechanism. As agents, the sellers and buyers, each of which has private information, voluntarily play the trading game according to the rules dictated by the mechanism. Participation at the exchange is endogenized by allowing sellers and buyers to have outside options. Three types of trading mechanisms are analyzed in detail: bargaining model, bilateral double auction with sealed bids, and double auction with multiple participants. The charge system is restricted to a two-part-tariff, commission plus entry fee. We find that individual strategies depend sensitively on the exact form of trading mechanism, the relative bargaining power between sellers and buyers, and the existence of outside options. On the other hand, the optimal charges and expected profit of the exchange are found to be remarkably insensitive to these microlevel details. Entry fees, though as effective as commissions in raising revenue, strongly discourage participation. We also point out the possibility that the existence of outside options can potentially lead to market unraveling at the exchange, when certain control parameters of the trading mechanism are not chosen judiciously.

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