The Emerging Knowledge Economy: Exchange in Internet Spot Markets for IT Expertise

There has been recent interest in Internet-enabled markets for professional services. We investigate the characteristics of these markets by examining bidding behavior in the most active area of these early knowledge markets: the market for IT contractors. These markets are important both because they provide an early view of the effectiveness of on-line service markets and because they have a potentially large impact on how IT services are procured and provided. Using auction theory, we develop a theoretical model that relates market characteristics to bidding and transaction behavior. The model is tested using data from one active on-line market for IT services. Our analysis suggests indicate that these markets are liquid with active bidding on projects and a high rate of contracting. In their current format, however, they may induce excessive bidding by service providers, raising the cost of transacting to all participants. Excessive bidding lowers the average quality of the bidding pool. Difficulties associated with excessive participation by service providers are more acute for high value projects, leading to fewer projects being contracted. Market design prescriptions, to resolve these problems, include limiting vendor participation and pre-screening service providers.