Chapter 12 Economics, Global, and Other Issues in Electronic Commerce

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Chapter 12Economics, Global, and Other Issues
in Electronic Commerce
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Learning Objectives

• Identify the major impacts of Web-based economics
• Describe the major components of Web-based
  economics
• Analyze the impact of online markets on
  competition
• Describe the impacts and industry structure on
  intermediation
• Describe the role and impact of virtual
  communities
• Evaluate the issues involved in global electronic
  commerce
• Analyze the impact of EC on small businesses
• Understand the research opportunities in EC
• Describe the factors that will determine the
  future of EC

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Marketplace Vs. Marketspace

• Markets have three main functions
• Matching buyers and sellers
• Facilitating the exchange of information, goods,
  services and payments
• Providing an institutional infrastructure
• Electronic Marketplaces Marketspaces
• Increase effectiveness
• Lower distribution costs
• Friction-free markets

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Marketplace Vs. Marketspace (cont.)

• Regular and EC economics are completely different
• EC involves gathering, selecting, synthesizing,
  and distributing information
• Economics of EC starts with supply and demand,
  and ends with pricing and competition

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The Components ofDigital (Virtual) Economics

• Digital Products

Information and entertainment products that are
digitized

• Paper-based documents books, newspapers,
  magazines journals, newsletters
• Product information product specifications,
  catalogs, user manuals
• Graphics photographs, postcards, calendars,
  maps, posters, x-rays
• Audio music recordings, speeches, lectures,
  industrial voices
• Software programs, games, development tools

Symbols, tokens and concepts

• Tickets and reservations airlines, hotels,
  concerts, sport events, transportation
• Financial instruments checks, electronic
  currencies, credit cards, securities

Processes and services

• Government services forms, benefits, and
  welfare payments, licenses
• Electronic messaging letters, faxes, telephone
  calls
• Business value creation processes ordering,
  bookkeeping, inventorying
• Auction, bidding, bartering
• Remote education, telemedicine, and other
  interactive services
• Cybercafes interactive entertainment, virtual
  communities

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The Components ofDigital (Virtual) Economics
(cont.)

• The Consumers people worldwide that surf the Web
  are potential buyers of goods and services
• The Sellers frontstores available on the Net,
  advertising and/or offering millions of items
• The Infrastructure Companies companies provide
  the hardware and software necessary to support EC
• The Intermediaries intermediaries of all kinds
  offer their services on the Web
• The Support Services ranging from certification
  and trust, which assures security to knowledge
  providers
• Content Creators media-type companies create and
  perpetually update Web pages and sites

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Competition in Electronic Commerce

• Impacts on competition
• Lower buyers search cost
• Speedy comparisons
• Differentiation
• Lower price
• Customer service
• Digital products lack normal wear and tear

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Competition in Electronic Commerce (cont.)

• Perfect competition
• Enable many buyers and sellers to enter the
  market at little or no cost (no barriers to
  entry)
• Not allow any buyers and sellers to individually
  influence the market
• Make certain products homogeneous (no product
  differentiation)
• Supply buyers and sellers with perfect
  information about the products and the market
  participants and conditions

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Competition in Electronic Commerce (cont.)

• Observations regarding competitiveness
• There will be many new entrants
• The bargaining power of buyers is likely to
  increase
• There will be more substitute products and
  services
• The bargaining power of suppliers may decrease
• The number of industry competitors in one
  location will increase

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Cost Curves
Cost per unit
Cost per unit
Optimal
Quantity
Quantity
Regular Products
Digital Products
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The Need for a Critical Mass of Buyers

• Reasons for the need for critical mass of buyers
• Fixed cost of EC is high, need many customers to
  cover it.
• Strong and fair competition can be developed
• Estimated Internet users worldwide
• 150-200 million range (1999)
• Small number as compared with an estimated 1.3
  billion TVs
• No need to wait a few years before starting EC
• Look at the microlevel segmentation of the market
  you are trying to reach

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Quality Uncertainty and Quality Assurance

• Price is becoming the major factor influencing
  many Web purchases
• Quality is extremely important in many situations
• Issue of quality is related to issue of trust
• Quality assurance by a trusted 3rd party is
  needed
• For example Trust-e and Better Business Bureau
  (BBB)

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Quality Uncertainty and Quality Assurance (cont.)

• Solutions for quality uncertainty
• Provide free samples
• clear signal that the vendor is confident about
  the quality
• Return if you are not satisfied
• providing a guarantee, or a full refund, for
  dissatisfied customers is facilitating EC
• returns not feasible for digital products
• many digital products such as information,
  knowledge, or educational material, are fully
  consumed when they are viewed by consumers
• returning a product or refunding a purchase price
  may be impractical due to transaction costs

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Pricing on the Internet

• Price Discovery
• Electronic marketplaces enable new types of price
  discovery
• Web-based auctions at Onsale.com and eBay.com
• Intermediaries such as Priceline
  (www.priceline.com)
• Agents such as Kasbah (ecomerce.medis.mit.edu/kasb
  ah)

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Online Vs. Offline Pricing

• How to price the online Vs. the offline products
  or services
• Pacific Brokerage Services (www.tradepbs.com)
• a discount broker
• offered almost 50 commission discount for online
  services
• Banking Industry
• most do not offer any discounts for going online
• some even charge additional online fixed monthly
  service fee
• some, whose strategy is to aggressively go
  online, provide discount
• Retailers
• no clear strategy

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Contributors to Electronic Market Success

• Product characteristics
• Digitizable products low priced items
  computers electronics, consumer products and
  even cars
• Industry characteristics
• The need for a transaction broker exists (e.g.,
  stocks)
• Seller characteristics
• In oligopolistic situations, sellers can maintain
  an environment of lower volume, higher profit
  margin transactions
• Consumer characteristics
• Patient and analytical consumers

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Impacts on Industry Structure

• Traditional market
• Customers search out information (about the
  products available and their prices, quality, and
  features) from a wide range of sources

Traditional Market Industry Structure
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Impacts on Industry Structure (cont.)

• Electronic markets
• The search cost for consumers is reduced
• Consumers can buy products for lower prices,
  intermediaries play new roles

Industry Structure with an Electronic Market
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The Roles and Value of Brokers in Electronic
Markets
Limitations of Privately Negotiated Transactions

• Search costs for finding partnershigh
• Lack of privacy can not remain anonymous
• Incomplete information a broker can get more
• Contracting risk of refusing to pay, poor quality
  products, etc.
• Pricing inefficiencies, opportunities may be
  missed

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Potential Winners and Losers in EC

• Winners

• Proprietary network owners
• Midsize manufacturers
• Technology suppliers
• Market makers
• Online dedicated companies
• Conventional retailers that use online
  extensively
• Providers of diversified Internet services
• Advertisement and target marketing companies
• Security, special infrastructure, and payment
  systems providers

• Internet access providers
• Portal providers
• A few large resellers
• EC software companies

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Potential Losers in EC

• Most wholesalers, especially small ones
• Brokers
• Salespeople
• Non-differentiated manufacturers

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Virtual Communities

• The Internet Communities
• Web is being transformed into a social Web of
  communities
• Types of communities
• Communities of transactions
• facilitate buying and selling
• Communities of interest
• place for people to interact with each other on a
  specific topic
• Communities of relations
• be organized around certain life experiences
• Communities of fantasy
• place for participants to create imaginary
  environments

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Virtual Communities (cont.)

• Ways to transform a community site into a
  commerce site

Build a site that provides that information,
either through partnerships with existing
publishers and information providers or by
gathering it independently.
Understand a particular niche industry, its
information needs, and the step-by-step process
by which it does the research needed to do
business.
Set up the site to mirror the steps a user goes
through in the information-gathering and
decision-making process.
Build a community that relies on the site for
decision support.
Start selling products and services, such as
sample chips to engineers, that fit into the
decision-support process.
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Virtual Communities (cont.)

• The Expected Payback
• Customer loyalty increases
• Increased sales
• Customer participation and feedback increases
• Increased repeat traffic to site
• Drive new traffic to the site

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Virtual Communities (cont.)

• Creating economic value
• Members input useful information in the form of
  comments, feedback, elaborating their attitudes
  and beliefs, and information needs of the
  community
• The community brings together consumers of
  specific demographic and interest
• Communities charge members content fees for
  downloading certain articles, music, or pictures

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Global Electronic Commerce

• While geographical market boundaries may be
  falling, global interest-based communities will
  spring up
• Mainly in support of business-to-business
  financial and other repetitive, standard
  transactions, e.g. EFT EDI
• The emergence of the Internet and the extranets
  resulted in an inexpensive and flexible
  infrastructure that can greatly facilitate global
  trade

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Barriers to Global Electronic Commerce

• Legal Issues
• Uncoordinated actions must be avoided and an
  international policy of cooperation should be
  encouraged
• Market Access Issues
• Companies starting e-commerce need to evaluate
  bandwidth needs by analyzing the data required,
  time constraints, access demands, and user
  technology limitations
• Financial Issues
• Customs and taxation

• electronic payment systems

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Barriers to Global Electronic Commerce (cont.)

• Other Issues
• Identification of buyers and sellers
• Trust
• Security ( for example, viruses)
• Cultural diversity
• International agreements (multi-lateral
  agreements)
• Role of government
• Purchasing in local currencies
• Language and translation

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The U.S. Policy RegardingGlobal Electronic
Commerce

• The private sector should lead
• Governments should avoid undue restrictions on
  electronic commerce
• Where government involvement is needed, its aim
  should be to support and enforce a predictable
  minimalist, consistent and simple legal
  environment for commerce
• Governments should recognize the unique qualities
  of the Internet
• Electronic commerce on the Internet should be
  facilitated on a global basis

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The Advantage for Small Businesses

• Inexpensive source of information
• Inexpensive way of advertising
• Inexpensive way of conducting market research
• Inexpensive way to build (or rent) a storefront
• Lower transaction cost
• Niche market, specialty products (cigars, wines,
  sauces) are the best
• Image and public recognition can be accumulated
  fast
• Inexpensive way of providing catalogs
• Inexpensive way to reach worldwide customers

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The Risks and Disadvantages for Small Businesses

• Inability to use EDI, unless it is EDI/Internet
• Lack of resources to fully exploit the Web
• Lack of expertise in legal issues, advertisement
• Less risk tolerance than a large company
• Disadvantage when a commodity is the product (for
  example, CDs)
• No more personal contact which is a strong point
  of a small business
• No advantage being in a local community

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Success Factors for Small Businesses

• International products
• Information

• Niche products
• Small volume
• Capital investment must be small
• Inventory should be minimal or non-existent
• Electronic payments schema exist
• Payment methods must be flexible
• Logistical services must be quick and reliable
• The Web site should be submitted to
  directory-based search engine services like Yahoo
  in a correct way
• Join an online service or mall and do banner
  exchange
• Design a Web site that is functional and provides
  all needed services to consumers

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Research in Electronic Commerce

• Behavioral Issues
• Consumer behavior
• Building consumers behavioral profiles and
  identify ways to utilize them
• Sellers behavior and motivation
• Issue-oriented research (e.g., trust,
  intermediaries)
• Internet usage pattern and willingness to buy
• Mental model of consumer product search process,
  comparison process, and negotiation
• How to build trust in the marketspace

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Research in Electronic Commerce (cont.)

• Technical Issues
• Methods that help customers find what they want
• Models for extranet design and management
• Natural language processing and automatic
  language translation
• Matching smart card technology with payment
  mechanisms
• Integrating EC with existing corporate
  information systems, databases, etc.
• Retrieval of information from an electronic
  industry directory
• Establishing standards for international trade
• Building a mobile Internet distribution command
  system

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Managerial Research Issues

• Advertisement
• measuring the effectiveness, integration and
  coordination
• Applications
• creating a methodology of finding EC business
  applications
• Strategy
• designing strategic advantage strategy for EC
• initiating Where to market strategy
• finding way to Integrate EC into organizations
• Impacts
• identify the necessary organization structure and
  culture
• integration with ERP and SCM

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The Future of Electronic Commerce

• Internet Usage increase exponentially access
  via cellphones!
• Opportunities for Buying increase rapidly
• Purchasing Incentives increase buyers
  advantages
• Increased Security and Trust significant
  improvement
• Efficient Information Handing accessible from
  anywhere
• Innovative Organizations restructured and
  reengineered
• Virtual Communities spreading rapidly
• Payment Systems ability to use e-cash cards and
  make micropayments is getting close to reality
• Business-to-Business continues to grow rapidly

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The Future of Electronic Commerce (cont.)

• Technology Trends
• Clients
• thin client and embedded client
• Servers
• Windows NT
• Networks
• xDSL and wireless communication
• EC software and services
• availability of all types of EC software
• companies support auctions and multiple types of
  certifications
• EC knowledge
• the quantity and quality of EC knowledge is
  increasing rapidly