Marketplace Liquidity: A Primer

Hi 👋 — At scale, marketplaces are wonderful businesses. But getting them to scale is fiendishly hard. That’s because of the chicken-and-egg problem with supply and demand. This note takes a look at marketplace liquidity. Thanks for reading.

Big is Beautiful

Marketplaces sell transactions. They connect supply and demand, facilitating commerce. For example, Uber connects drivers (supply) and riders (demand), taking a cut of the revenue for playing matchmaker. Similarly, Airbnb connects hosts (supply) with guests (demand), and also takes a cut.

At scale, marketplaces are beautiful businesses. First, they’re asset-light. They don’t need to buy inventory or require heavy capital expenditures. While American Airlines needs to buy Boeing 747s, Uber doesn’t need to purchase a fleet of vehicles, it just needs to acquire drivers. Additionally, marketplaces have network effects. Buyers want to be where sellers are and sellers want to be where buyers are. More sellers attract more buyers and vice versa. This sparks a virtuous cycle and is why marketplaces tend to be winner-takes-most. Asset-light plus network effects equals potentially fat profits. However, scale is the operative word. Scaling a marketplace is hellishly difficult.

What is Marketplace Liquidity?

What makes marketplaces difficult to crack is the chicken-and-egg problem. How can you create demand when there’s no supply? How can you create supply when there’s no demand…