Electronic Intermediary Functional Roles and Profitability

Internet start-ups and traditional firms expanding existing offerings and services through the Net have seen both success and failure. For such business model pursuits, electronic intermediation possesses the ability to cultivate new marketplaces and restructure supply chains. The economic literature identifies four distinct intermediary roles, specifically: (i) information and (ii) logistics management, (iii) transaction securitization, as well as (iv) insurance/market-making and liquidity management. Research notes that electronic intermediaries, while possessing clear advantages in their ability to manage information, face greater challenges in allowing parties to benefit from the facilitation of more complex coordination activities, namely transaction securitization in addition to insurance/market-making and liquidity management. In an effort to better understand pursuit of functional intermediary roles, our analysis of data collected on 182 electronic intermediaries explores relationships between intermediation roles and profitability. Business models relying solely upon the provision of information management are likely to realize lower levels of profitability. Alternately, the intermediary roles of logistics management as well as insurance/market-making and liquidity management realize higher levels of profitability. Moreover, when comparing commodity- and service-based intermediaries, the provision of logistics management on the part of commodity-based firms sees higher levels of profitability, with insurance and liquidity provisions associated with greater profitability for both commodity- and service-based firms. Finally, when contrasting traditional firms expanding operations in digital markets with Internet pure-plays, we find transaction securitization functions increase the likelihood of realizing greater profitability for non-Internet pure-plays.