The purpose of this paper is to understand buyer/seller adoption dynamics in independent, buyer-side B2B exchanges. In a stylized model, we assume that the main role of the exchange is to reduce search costs for buyers. Buyers and sellers enter or exit the exchange based on the relative economic surplus (loss) they receive inside vs. outside the exchange. We contrast two situations: one where participants' switching cost to join the institution is negligible and another, in which it is significant. In an extension, we also explore the impact of buyer/seller heterogeneity on adoption dynamics. We have three key findings with relevant implications for practice. First, we find that the general view that demand and supply (so-called “liquidity”) either grows or shrinks in the marketplace may not hold. In the presence of switching costs, the exchange can evolve to a stable state with only partial market participation. Second, our results suggest that the exchange is better off subsidizing buyers as opposed to sellers in order to achieve the so-called “critical mass”, beyond which there is full participation. Finally, we find that while in general, “minor” buyers of the industry have more incentive joining the exchange, when the fixed participation fee of the exchange is high, it is “major” buyers who are likely to join first. For sellers, this is not the case: minor sellers are always more keen in participating in a buyer-side exchange. Copyright Kluwer Academic Publishers 2003
