TradeMe is one of the key examples that I use when teaching about platform markets in my ECONS101 class. But competition from Facebook Marketplace is causing TradeMe to change its business model, and those changes are risky.
The reason why TradeMe is such a good example is that, by attracting buyers and sellers to its platform in the 1990s, TradeMe managed to keep eBay out of the New Zealand market. How did that happen? In a platform market, the firm (in this case, TradeMe) acts as an intermediary that brings together two parties (in this case, buyers and sellers) who would not otherwise interact or easily connect. Buyers using TradeMe create value for sellers, and the more buyers there are, the more value is created. Sellers using TradeMe creates value for buyers, and the more sellers there are, the more value is created. Once TradeMe was set up and had attracted a large share of buyers and sellers, it would be difficult for any other platform to set up in competition with TradeMe. And so, eBay couldn't get a foothold in New Zealand, and TradeMe had an effective monopoly over online auctions for many years.
TradeMe profited by charging a 'success fee' to sellers of goods on the platform. Buyers faced no fees. This reflects the principle that a platform firm (like TradeMe) should set a lower price for access to the platform to whichever side of the market has demand that is more elastic, ceteris paribus. In this case, buyers have more elastic demand for access to TradeMe, as there are many other places that they might go to buy things. Sellers, on the other hand, had more inelastic demand for access to TradeMe because no other place had access to the same quantity of buyers. That is, until Facebook Marketplace appeared.
Facebook Marketplace doesn't charge fees to sellers. And through its links to Facebook users, there are a large number of potential buyers on Facebook Marketplace. And so, there is now a viable (and cheaper) alternative to TradeMe for sellers. And now, TradeMe has finally reacted to this competition, as reported in the New Zealand Herald last month:
Trade Me is removing success fees for casual sellers, in a move that one marketing expert says is probably a response to the growing power of Facebook Marketplace.
Sellers have usually been paying 7.9% of the final sales price of items sold via Trade Me.
But a new fee structure will remove them from next week and site spokeswoman Lisa Stewart said casual sellers would be better off.
It is making other changes at the same time: bank transfers will not be possible and Ping will be offered on every listing alongside cash and Afterpay, with a 2.19% transaction fee for the seller. This provides buyer protection up to $5000 if trades go wrong.
Buyers will also pay a new service fee based on the purchase price, if items are more than $20. This will be 99c for goods sold for $20.01 to $100, $1.99 for sales between $100.01 and $250 and $4.99 for items over $250. Stewart said 44% of trades were under $20.
It was a response to customer feedback and what was happening in the market, Stewart said...
Massey University marketing expert Bodo Lang said it was likely to be in response from growth in the use of Facebook Marketplace, which offers no protection for buyers but charges no fees.
With Facebook Marketplace available for sellers, seller demand for using TradeMe has become more elastic. While the 'success fees' have been eliminated, TradeMe will still profit from sellers through mandating the use of its payment service Ping. And notice that buyers will also now pay a 'service fee' to TradeMe on successful purchases over $20. TradeMe is now leveraging its market power to derive revenue from a complementary good (payment services) rather than the auctions themselves. This change makes TradeMe's business model resemble that of Facebook Marketplace. Meta derives revenue from Facebook Marketplace though selling advertising (on Facebook Marketplace, but also on Facebook), rather than deriving revenue directly from the sales on Facebook Marketplace.
It remains to be seen whether Trademe's new business model will be successful. I question the wisdom of charging a service fee to buyers. They are still the more elastic side of Trademe's platform market, and they have a cheaper option available in the form of Facebook Marketplace. TradeMe is banking on buyers valuing the protection that TradeMe offers them, which Facebook Marketplace does not. However, it isn't clear how much buyers value that protection, and if they don't value it in excess of the new service fee, then they will continue to exit to Facebook Marketplace. And if buyers show an increasing preference for Facebook Marketplace, it won't be long before sellers start to reduce their listings on TradeMe. And if that happens, the market could tip and TradeMe could very quickly find itself in an irreversible decline.
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