Knowledge-Based Intermediaries

Intermediaries

There have been many predictions and prescriptions for reduced intermediation in electronic markets. These predictions are based on the assumption of increasing reliance on information technologies to connect economic agents directly, in lieu of intermediaries (Bakos, 1998; Malone, 1989). These predictions, by and large, have not materialized, except for isolated instances of limited disintermediation in some information-intensive industries. In fact there is some evidence that there may be an increasing role for intermediaries in electronic markets, as compared with traditional markets (Andersen & Andersen, 2002; Sarkar et al, 1995). Intermediaries are third parties that facilitate economic transactions between the primary economic agents. As such, intermediation is an information-intensive activity. It requires considerable information about buyers and sellers to be collected, organized, processed, and distributed. The predictions for reduced intermediation are often based on the assumption that information technologies could completely automate intermediation, or so fundamentally simplify it that it can be absorbed into the operations of buyers and sellers. Information technologies are designed to reduce the cost of information-based activities, and hence they are poised to reduce the cost of intermediation, but not necessarily capable of automating them completely or even substantially. Since reducing the cost of a vital economic activity is likely to increase the utilization of that activity, it is reasonable to expect an increase, not a decrease, in intermediation in electronic markets, as compared with traditional markets. We will present four hypotheses in favor of substantially increased intermediation in electronic markets. Moreover, we will argue that the new intermediaries will need to be significantly different from the existing intermediaries, and they need to be explicitly designed to take advantage of the new technologies. We will take a design perspective and present a specific architecture for the new intermediaries.

1. Information Technologies favor markets and outsourcing. Markets and outsourcing can benefit from intermediation: Markets and hierarchies are often presented as two opposing organizational structures, and information technologies have been claimed to favor markets at the expense of hierarchies (Bichler, 2001; Malone, 1989). The argument is based on the inherent advantage of markets in creating specialization, and economies of scale, by outsourcing various activities to specialized businesses that perform them for all who need them. However, these advantages come at a cost of extensive communication and coordination required by markets. As information technologies reduce the cost of communication and coordination, increasing reliance on outsourcing and markets is expected, to take advantage of specialization and economies of scale. Yet, such outsourcing is not a trivial exercise, and it is not likely to be a simple shift from hierarchies to markets. It may require extensive intermediation to alleviate the control and coordination problems arising from extensive outsourcing and market orientation, since control and coordination are not mere communication problems, but require extensive information processing and analysis. Intermediation can reduce the cost of information processing and analysis through specialization (Sarkar et al, 1995).