Marketplaces or Web Services? Alternate Business Models for Electronic B2B Transactions

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.