Network Effects Aren’t Enough

by Andrei Hagiu and Simon Rothman

IN MANY WAYS, ONLINE MARKETPLACES are the perfect business model. Since they just facilitate transactions between suppliers and customers rather than take possession of or full responsibility for products or services, they have very low cost structures and very high gross margins—70% for eBay, 60% for Etsy. And network effects make them highly defensible. Alibaba, Craigslist, eBay, and Rakuten are more than 15 years old, but they still dominate their sectors.

Little wonder that entrepreneurs and investors are rushing to build the next eBay or Airbnb or Uber for every imaginable product and service category. In the past 10 years, the number of marketplaces worth more than $1 billion ...

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