Digital Market

INFS7040 E-Commerce for Managers

Semester 2, 2007 – Major Assignment

Managing the Digital Enterprise

Digital Markets

Ahmad Fauzie Nur (u4450324), Andress Hamenda (u4330344),

Andrey Hasiholan Pulungan (u4435830), Anindya Khrisma Sari (u4383790) Patarika Piyapanee (u4348405),

Word Count: 8,540 words (excluding references) Due Date: Monday 17 September 2007, 12:00 noon as follows:

E-copy: via email to [email protected]

Paper copy: assignment box, ABIS School Office Last Update: 16 July 2007 File Name: INF7040_Assignment_Template v 02.doc

Writing Documentation That Works

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Contents

1. Introduction 1

2. Key Success Factors in the Digital Market 2

3. Major Issues/Considerations 4

3.1. The Types and Infrastructure of Electronic Market.......................... 4 3.1.1. The Types of Electronic Market .............................................. 4 3.1.2. Electronic Market Infrastructure .............................................. 5

3.2. The Effects of Digital Market on Price........................................... 7 3.2.1. Digital Market and Price Elasticity of Demand.......................... 8 3.2.2. Digital Market and Price Dispersion ........................................ 9

3.3. Switching Costs in the Digital Market ......................................... 10 3.3.1. The Importance and Types of Switching Costs........................ 11 3.3.2. The Movement of Switching Costs in Electronic Markets ........ 12

3.4. Promotion in Digital Market ....................................................... 12 3.5. Customer Relationship Management ........................................... 16 3.6. Ethics in the Digital Market ........................................................ 19

3.6.1. Privacy ............................................................................... 19 3.6.2. Trust................................................................................... 20 3.6.3. Security .............................................................................. 21

4. Potential Impact 22

4.1. Impact of Digital Market on Society ............................................ 22 4.2. Impact of Digital Market on Organisations................................... 24 4.3. Impact of Digital Market on Individuals....................................... 25

5. Conclusion 27

6. References 28

Writing Documentation That Works Introduction

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Tables

Table 1: Membership and Individual Contribution............................................................................b Table 2: Human Resources Mismanagement Penalties. .....................................................................b Table 3: Topics and Teams....................................................................................................................ii Table 4: Internet Advertising Method................................................................................................14

Figures

Figure 1: Percentage of Global Population with Internet Access ......................................................2 Figure 2: The E-Business Market Trading Model ..............................................................................5 Figure 3: Electronic Payment Process ..................................................................................................6 Figure 4: Percentage of Business with Internet Access.....................................................................23

Writing Documentation That Works Introduction

© Copyright 1995, Tuffley Computer Services, Ver 2.0 Page 1

1. Introduction

Digital market today is playing a significant role in the world’s economy

particularly in the way of conducting business. Both digital and traditional markets

have a basic function of assisting the buyer and seller conducting transaction through

the exchange of products, information and payment (Bakos, 1998, p.35). Moreover,

the application of internet in commerce is predicted may reform the communication in

the marketplace and lead to the perfect market, which has many sellers, buyers and

substitutable goods and services as well as symmetric information (Bar, 2002, p.29).

For years, digital market has raised many issues, for instance whether digital

market increases the level of competition in the market or whether digital market

affects the price. Janssen and Moraga (2000, p.2) argue that the internet will reduce

the search cost for consumer and increase competition among sellers that will lead to

higher level of welfare and lower price of commodity. Another researcher, Bakos

(1998, p.42) also claims that it is clearer that internet-based marketplaces will support

better economic efficiency and maintain economic growth.

The digital market may also change the way of the business implementing the

marketing strategy and managing its relationship with costumers. Song and Zahedi

(2005, p.222) state that the internet can be used as an alternative medium by business

to perform product branding and conduct transaction and maintain the relationship

with public. This may bring positive effects on lower cost of communication and

transaction, improved communication with customers and vendors in the terms of

speed and quality, as well as broader market scope (Song & Zahedi, 2005, p.222).

The objectives of this report are to analyse the key aspects in digital market and

how the digital market affects the market dynamics nowadays as well as its impact on

individuals, organizations and society in overall. To achieve those objectives, we

examine six major issues in digital markets, which are communication infrastructure

of digital markets, the effect of digital market on price, switching costs, promotion

and customer relationship management function, and ethical issues in electronic

market. Furthermore, we explore the overall effects of digital market on society,

organizations and individuals. Finally, in the last section, we present the conclusion of

all issues in the digital market.

Writing Documentation That Works Key Success Factors in the Digital Market


2. Key Success Factors in the Digital Market

Digital market or e-market is an international organization systems where

buyers and sellers exchange information each other about products offered and price

(Bakos, 1991, p.296). Varadarajan and Yadav (2002, p.297), then, extended the

electronic market definition as networked information systems enable buyers and

sellers to exchange information, trade, and execute other activities related to the

transaction made. The purpose of digital market is to attract large numbers of

suppliers and buyers, which then become the member of that marketplace (Ferreira &

Ferreira, 2004, p.254).

The role of internet in trading and commercial activities has become dominant

over time. Figure 1 below shows how the percentage of internet users in the world had

been increased in 1995-2000 (Chaffey 2002). The interactive between buyers and

sellers has been transformed from physical to virtual form. Time and distances are no

longer being the barriers or obstacles for buyers and sellers to make a transaction

through the internet. It creates a borderless world that change the way of business

today.

Figure 1: Percentage of Global Population with Internet Access Source: www.nua.ie/surveys , cited in Chaffey, 2002.

Writing Documentation That Works Key Success Factors in the Digital Market


Many companies can achieve their best performance by using information

technology or internet in their operations. According to Turban et al (2008), Boeing,

for instance, can successfully develop their jet aircraft with its 3800 direct suppliers.

In maintaining the relationship with its suppliers, Boeing develop ten multimedia

rooms for the use of collaboration teams which is open 365 days a year, 24 hours a

day (Turban et al. 2008).

On the other hand, Clark (2001) reported the bankruptcy of Boo Hoo, an e-

tailer company. Boo Ho collapsed because they fail to get sufficient buyers fast

enough to generate revenues that exceed the company’s setup cost (BBC 2000).

People who visited their websites have over expectations on Boo Ho (Clark 2001). At

the end, Boo Ho were forced to sell their technical equipment to another UK internet

venture and sell their web address to a Unites States fashion retailer (Clark 2001).

There are several reasons that might cause the failure companies that

participate in the digital market. First, companies might not aware of the price

structure in the digital market. Second, the high cost of customer relationship

management reduces significantly the profit of companies. Third, companies fail to

ensure the customers of the security and privacy of customer data, so that customers

are reluctant to conduct transactions in the digital market. Therefore, the purpose of

this report is to analyse several important factors that are required to support the

success of companies in the digital market.

Writing Documentation That Works Major Issues/Considerations


3. Major Issues/Considerations

In this section, we examine six different issues related with electronic markets.

First, we explain the communication infrastructure needed to support the operation of

digital market. Second, we evaluate the effects of digital markets on the price,

particularly about the price elasticity of demand and price dispersion. Third, the effect

of digital market in the switching cost will be described. Fourth, we examine how

digital market affects the marketing strategy as well as the customer relationship

management implemented by the seller. Finally, we analyse the ethical issues in

digital markets

3.1. The Types and Infrastructure of Electronic Market

As stated earlier, electronic market is a place that links buyer and seller.

Electronic market is unlikely to sustain unless it has a large number of buyers and

sellers, for example MetalSite, an electronic market in metal industry, was shut down

in 2001 because the trade volume was too small for MetalSite to survive (Papazoglou

& Ribbers, 2006, p.217). In contrast, Ebay is able to survive because it has 233

million registered users worldwide (Ebay 2007). Gillespie (2005) reports Amazon had

nearly 49 million active customers, in which most of them bought more electronics

during 2004 holidays. Furthermore, Yahoo and media companies CNET states in their

annual reports in 1998 that their profitability was driven by customer loyalty

(Goldfarb 2003, p.266).

3.1.1. The Types of Electronic Market According to Berryman et al. (cited in Chaffey, p.43), there are three types of

electronic marketplace:

1. Sell-side electronic marketplace is a site which is controlled by seller. For

example the supplier’s home page which can facilitate e-commerce

transactions.



2. Buy-side electronic marketplace or buyer controlled site is an intermediary in

which the buyer initiates the creation of the market. For instance when the

buyer requests to the number of suppliers through the intermediary, to procure

the goods and services required.

3. Marketplace or neutral site is an autonomous intermediary who can provide

the comparison of price and product.

3.1.2. Electronic Market Infrastructure

According to Papazoglou and Ribbers (2006), in electronic markets, there are

suppliers who offer their products to the electronic market and buyers who search and

review product offerings. Orders from buyers are then sent to suppliers through

messaging system, which also communicates the order status to buyers (Papazoglou

& Ribbers 2006). Figure 1 below shows how electronic markets working.

Figure 2: The E-Business Market Trading Model

In conducting purchasing transaction in electronic market, the credit card is

the most common method of payment. That is why most of transaction on the web

depends on credit card payment processes (O’Brien 2005) However, in banking and

retailing industries, the major form of payment systems is electronic fund transfer

(O’Brien 2005). Figure 2 below shows electronic payment done in electronic market.

Supplier Supplier Supplier Supplier

E-market

Buyer Buyer Buyer Buyer

register/offer/sell

search/select/buy

Source: Papazoglou & Ribbers 2006



Figure 3: Electronic Payment Process Source: O’Brien 2005

The question is how sellers can offer their products to market place, and how

buyers can search and review offers from sellers. In other words, what types of

communication technologies are needed to form the electronic market infrastructure.

Several researchers, for example Bar (2002), Maes, Guttman, and Moukas (1999,

p.81) argues that basically internet provides infrastructure and channel for the

electronic market. Internet is the “global interconnected network environment”

(Turban et al. 2008, and Strauss, El-Ansary, & Frost 2003). It is a place where buyers

and sellers meet and make business transaction (Bar 2002, p.39). It also makes

exchanging information about product and services become faster (Bar 2002, p.36).

The debate about the internet as the infrastructure of electronic market is

whether internet is only a network-aided commerce, which is to make market process

more efficient rather than essentially a new market process (Bar 2002, p.27). The

improvement that the internet offers is argued similar with any other improvements

done by communication technologies (Bar 2002, p.37). For example the invention of

fax also enables buyers and sellers to exchange information faster. Internet only

makes it more rapidly and possibly more efficient. Thus, there are two reasons behind

this argument; first, in order to be the basic of a new market process, the

Customer Merchant

Client Browser

Merchant’s Web Server

Request

* Verify merchant* Receive order info* Receive payment info* Confirm order

Payment Server

* Verify customer* Review payment info* Authorize or deny payment

Online third-party computers with links to multiple payment systems

Credit Cards Bank Accounts Online Buying E-Bill Payment Electronic Cash

VISA Debit cards Payflow Pro CheckFree BillPointMasterCard Online banking 1 ClickCharge Paytrust Paypal



improvements done by internet need to be different with what has been done by

previous communication technologies and, second, the improvements represents the

first phase in a new cyclical pattern of the new market (Bar 2002, p.37).

Nevertheless, Bar (2002, p.38) states that internet becomes the communication

technology that underlies the new market process mainly because it develops new

market architecture. The infrastructure of the traditional market is physical (Varadajan

& Yadav 2001, p.296), in where the organizations are brick-mortar, which are purely

physical organizations (Turban et al. 2008). Basically, the physical marketplace can

only be reached by nearby consumers. In contrast, with the internet, the market

infrastructure is no longer physical but network or electronic (Varadajan & Yadav

2001, p.296). The impact, then, electronic markets can serve much larger scale of

sellers and buyers (Varadajan & Yadav 2001, p.296). For example, Kelkoo.com,

founded in 2000, served 8.5 million users from across Europe

(http://www.kelkoo.co.uk/co_4293-corporate-information-company.html).

Hence, we find internet can be defined as a communication technology that

forms a new market process because it does not only create market more efficient, but

because it underlies the new market architecture. Internet has created the new market

infrastructure, which is network. It is different with the physical infrastructure used in

traditional market.

3.2. The Effects of Digital Market on Price

The internet is believed to change the structure of market closer to perfect

competition. In the economic theory, a perfectly competitive market is identified by

homogenous product, no power to set the price, mobility of resources and symmetric

information among participants (Thompson Jr. & Formby 1993). Internet attracts

more buyers and sellers to participate in electronic exchange because of the benefits

offered by the transparency of information in that market. Buyers that have more

information about the product will have better decision making. Sellers also gain

better knowledge of their customers, business partners and competitors. Furthermore,

with low cost of implementation and wide offerings of applications, internet will

lessen the entry barrier and spread the bargaining power among the participants in the

market, which then bring near to perfect market (Bar, 2002, p.28).



The market that is more efficient may affect to the fall of price, to the narrow

price spread, to the smaller and more frequent price changes and high price elasticity

of demand (Bailey cited in Häring 2003, p.2). The internet reduces the cost of

searching of customers, thus, lessens the bargaining power of sellers in the market,

particularly in setting the price (Janssen & Moraga, 2000, p.2). On the other hand,

suppliers also try to increase profit, which may decrease due to lower cost of

searching, by increasing the level of its product differentiation (Bakos, 1998, p.41).

Thus, in the next parts, we examine the explanation of the effect of the digital market

to the price in digital market will cover price elasticity of demand and price

dispersion.

3.2.1. Digital Market and Price Elasticity of Demand The implementation of the digital market in exchanging goods and services

might affect the level of price elasticity of demand. Price elasticity of demand would

become higher since buyers tend to search for the best price for the goods and

services needed, particularly for homogenous products. Ellison and Ellison (2004,

p.4) found that search-for-price activity through the internet was frictionless and

might affect to the significant increased demand elasticity. Moreover, charging the

low price for low quality goods might encourage not only their sales, but also the

medium and high quality products (Ellison & Ellison, 2004, p.4). Chevalier and

Goolsbee (2003, pp.204-205) found that in the online book market, for example

Amazon.com and BarnesandNoble.com, the price was more volatile than in the

conventional market. In addition, the demand in this homogenous market was

significantly elastic to price (Chevalier & Goolsbee, 2003, p.216). This result is

consistent with the research conclusion conducted by Brown and Goolsbee (2002,

p.483) in the life insurance industry. Furthermore, these outcomes may happen

because the buyer is provided with the facility to search and compare the price in

easy, inexpensive and fast way (Rappa, 2007). Besides the frictionless of the price

searching activity, another factor that drives the decline price is the advertisement.

The more frequent the product advertised in the internet, the tendency of its price to

decline became higher (Clay, Krishnan & Wolff, 2001, p.522).

In contrast, other researchers have found that the demand was far from

sensitive related to the sellers’ products sales, even in homogenous products. Smith



and Brynjolfsson (2001, p.542) conducted a research using the sample of shopbot

consumers, who were considered as the most-price-sensitive consumers. They found

that the consumers really considered about the brand of retailers, even for the

homogenous product, in this case were books (Smith & Brynjolfsson, 2001, p.542).

There were two reasons behind this finding, which first, the brand might reflect the

non-contractible aspects (i.e. quality) of products, which were not informed well in

the electronic market, for example the shipping time (Smith & Brynjolfsson, 2001,

pp.542,553-555). Second, suppliers tended to differentiate their products and services

from their competitors (Smith & Brynjolfsson, 2001, p.542,556-557). Thus, it

becomes difficult to compare those goods because of their differentiated

characteristics. The demand, furthermore, becomes less sensitive to the price changes.

Despite the increasing number of information provided by the internet, the

asymmetric information among the participants still does exist. The quality of

products and its related services were not well informed through the internet (Ellison

& Ellison, 2004, pp.3). Moreover, sellers had the intention to do that obfuscation in

order to make their consumers less informed of the product then could not compare

the price accurately (Ellison & Ellison, 2004, pp.4,38-40). The motive of sellers

behaving in that way was to avoid direct price competition because they had to cover

relatively high expenses related with the adoption of internet, handling the order

individually and the increasing number of advertising (Ellison & Ellison, 2004,

pp.4,38-40).

3.2.2. Digital Market and Price Dispersion In this part we examine whether the electronic market could affect the price

dispersion. The major factor of the narrow price dispersion is the low of searching

cost. Brown and Goolsbee (2002, pp.504-505) found that in the early stage of the use

of internet as a searching tool, price dispersion in life insurance market increased.

However, as the wider spread of internet use, its dispersion becomes narrow Brown

and Goolsbee (2002, p.505). The more numbers of consumers involving in the online

market and searching intensively made tougher the competition among the sellers,

thus brought the pressure to the sellers to keep the price close to their competitors. It

also happened in online book industry (Clay, Krishnan & Wolff 2001, pp.521-522).



On the contrary, sellers tended to avoid the price competition by

differentiating their products and services from their competitors. They did

differentiation in brand, price as well as the depth of the offerings (Clay, Krishnan &

Wolff, 2001, p.522). This strategy was supported with fact that there was not equal

competition among commodity goods and some numbers of consumers did not

migrate to online market (Clay, Krishnan & Wolff, 2001, p.537).. The sellers applied

high price to get surplus from those offline consumers, which might cause substantial

amount of the price dispersion still existed (Janssen & Moraga, 2000, pp.3-5).

Generally, even in the homogenous product,,sellers try to deliver distinct

products and services to their consumers. They prefer to increase their economies of

scope than to increase their economies of scale. Sellers avoid the direct price

competition in order to get higher revenues over their high expenses. In addition, the

heterogeneity of buyers particularly in their needs and preferences might support the

implementation of differential pricing (Clemons et al., 2002, p.75) Moreover, the

existence of asymmetric information among participant in online market, particularly

in buyers’ side might also bring the same effect (Bailey, Faraj, & Yao, 2007, pp.57-

59). Then, the substantial price dispersion will exist.

Overall, we find that in most cases, suppliers tend to differentiate their

products and services to customers because they are more likely to avoid direct price

competition that may reduce their profits. As the result, they tend to set their price that

is different with the average price in the market. The price elasticity of demand, thus,

will not be as higher as expected and there will be still significant price dispersion in

the market.

3.3. Switching Costs in the Digital Market

Switching costs can be defined as costs incurred when economic agents, for

example buyers change their suppliers (Ke, Minyi, & Li, 2004, p.1). It is like ‘two

edged sword’ (Shapiro & Varian, 1999, p.111), which may be dislike by customers,

but embraced by certain suppliers. According Goldfarb (2003, p.267), switching cost

in electronic market can be measured and easily perceived, such as email accounts, or

can be more subtle, for example psychological cost or brand loyalty cost (Klemperer,

1995, p.518). In this section, we discuss why switching costs are important in the



digital market, types of switching costs and whether switching costs decline in digital

market.

3.3.1. The Importance and Types of Switching Costs Switching costs should be considered important in digital market (Glassberg &

Merhout, 2000, p.54) because they may determine the success or failure of sellers in

electronic market. Switching costs prevent customers to move to other suppliers

(Chenn & Hitt, 2000, p.134), thus, if a company fails to recognize the switching costs

in its business competition, the company is likely to have a high risk of failure

(Shapiro & Varian, 1999, p.111). As this essay explains previously, an electronic

market needs a large number of buyers and sellers to keep going (Papazoglou &

Ribbers 2006), thus, many emerging e-commerce companies intend to recruit new

customers (Chenn & Hitt, 2000, p.134) so they may survive. However, there are

customers who are reluctant to change their existing suppliers to the new one. In some

cases, it may cause the close of electronic market. Eumedix, for example, could not

continue its electronic market operation in medical industry because of the reluctant

of hospitals to change their suppliers, which created difficulties to the new suppliers

to sell their products (Papazoglou & Ribbers 2006). At the end, Eumedix did not have

sufficient number of buyers and sellers, which caused Eumedix to close its operation

(Papazoglou & Ribbers 2006).

Klemperer (1987, p.375) argues that there are three types of switching costs,

which are transaction costs, learning costs, and artificial or contractual costs.

Transaction costs are costs occurred to begin a new relationship with a supplier and

occasionally also include the costs needed to end an existing relationship (Chenn &

Hitt, 2000, p.136). Second, learning costs are the effort needed by customers to learn

a new product so that they can use it in the same level of comfort or facility with the

old product (Chenn & Hitt, 2000, p.136). If somebody makes a cake mix, for

example, it is easier for that person to buy from the same brand that the person

already familiar with because the person already knows how to prepare the mix cake

by using it rather than to buy a new brand, even though the person knows that those

brands have the same quality (Klemperer, 1995, p.517). Shapiro and Varian (1999,

p.117) includes the learning cost as part of searching cost. Artificial switching costs



are costs made by intentional actions of firms and are very common in the

marketplace, such as frequent flyer programs (Chenn & Hitt, 2000, p.136).

3.3.2. The Movement of Switching Costs in Electronic Markets It is argued that information technology might reduce the switching cost,

particularly searching cost. Benslimane, Plaisent, and Bernard (2001, p.221), for

example, concludes that the used of the world wide web could reduce search costs

because the world wide web may help buyers to identify potential suppliers quickly

and easily. Similarly, Xiao, Feng, and Roche (2005, p.189) suggest that information

technology is likely to reduce searching costs, which is the part of switching costs,

yet, the effect of information technology is insignificant to the switching cost in

overall (Xiao, Feng, & Roche 2005, p.189).

On the other hand, Chen and Hitt (2000, p.143) and Chen (2002, p.92)

empirically measured online switching costs in the online broker market and found

that switching costs vary substantially across brokers in electronic markets. Chen

(2002, p.92) also found that firms can significantly control their switching cost

through retention strategies. Goldfarb (2003, p.272) concludes that switching costs

faced by users can create market power and economic profits. Suppliers may create

switching cost to increase their profitability (Goldfarb, 2003, p.273). Ivang and

Sorensen (2005, p.401) argue that interdependency relationship between suppliers and

customers increase the switching cost for both suppliers and customers.

Generally, we found that switching costs do not significantly decline in the

electronic market. Information technology seems to be only able to reduce searching

costs but not to the switching costs in overall. Even though buyers attempt to reduce

switching costs by bargaining and having alternative suppliers, suppliers are likely to

increase the switching costs in order to retain their existing customers (Shapiro &

Varian 1999, pp.135-141). Thus, switching costs will be difficult to decline.

3.4. Promotion in Digital Market

The debate about how effective the promotion in the electronic market has

been raised for years. As explained earlier, in the digital market, buyers and sellers do

not have to meet physically in certain place and specific time to make transactions.

They can do it from everywhere and anytime. However, buyers face some



uncertainties about products that they want to buy, particularly about the physical

conditions of products since they cannot examine the product physically (Sun, 2006,

p.626). In doing promotion in the digital market, information has become its own

viable product because the physical product has been replaced by the product

information on web site (Allen & Fjermestad, 2001, p.14). On the other hand, sellers

have to answer challenges in providing the information accuracy and reliability about

their products through the internet.

Allen and Fjermestad (2001, p.18) argue that the ‘traditional marketing’ is no

longer effective and tends to be expensive over time. Sellers must initiate and

maintain the relationship with their potential buyers so that they will be able to sell

their products repetitively in the future (Allen & Fjermestad, 2001, p.18). Other

researcher, Sun (2006, p.626) also argues that by using the internet, sellers can give

the signals to buyers who are able to search and learn for further information about

the products.

Sellers can conduct several approaches in promoting their products through the

internet, such as unsolicited advertising, permission marketing, as well as interactive

and targeted advertising (Turban et al. 2008). Unsolicited marketing is a method of

distribution of emails to several potential customers without their request or

permission before (Turban et al. 2008). This type of marketing is including ‘spam’

and ‘pop-up’ advertising (Turban et al. 2008). Permission marketing asked

authorization first from the consumer to receive the online advertising and e-mail

(Turban et al. 2008). Usually the costumer will receive e-mails periodically or

advertising messages with incentives. (Turban et al. 2008). Targeted advertising is

using specific group as the marketing target (Turban et al. 2008). There are many

methods of internet advertising can be used as decribed on following table.



Table 4: Internet Advertising Method

Buyers can now compare the competing products and services with minimal

effort and less personal time (Srinivasan et al., 2002, p.41). Through digital market,

buyers have many choices of product sizes, types, and colours. On the other hand,

through the web pages or internet, sellers can provide almost unlimited information,

especially if it contains links to different sites (Samaniego, Arranz & Cabezudo 2006,

METHOD DESCRIPTION

Banners and buttons

Brief ads that can be targeted or customized; you can click on them to go to the advertiser’s site

Pop up, pop under Automatically launched, unsolicited, when you wait, enter, or exit Web Sites

Automated targeted advertising (search-related ads)

Google’s AdSense and Microsoft’s AdCenter are leading examples. These are targeted text hints that appear when you conduct a search

Sponsored links in search engine results

Appear on top or right side of a page; bring you search results of Google, Yahoo, MSN, or other search engine. Paid by sponsors to be on first page

E-mail Relatively inexpensive. Can be targeted to a group of recipients or individuals; frequently unsolicited.

Electronic catalogs and rich media ads

Advertise products/services; some with price comparisons

Spy ware banners Advertiser-sponsored unsolicited ads; can be in different formats

Classified ads Similar to newspaper classifieds. Search them to find what you need

Wireless localization Knowing where you are, an ad is sent to your cell phone or PDA regarding a business close to your location

Online chat Customers are invited to text chat with sales representatives

Affiliated marketing Advertisers pay Web sites (“partners”) to place a banner on partner’s sites

Blog advertising Advertisers pay blog owners commission if visitors click (and buy) on banners displayed in the blogs

Viral marketing Online “word-of-mouth”, ”forward our information to others”

Online promotions Several innovations that provide entertainment or incentives to be exposed to ads

Source: Turban et al. 2008



p.165). Sellers can also use hyperlinks as the effective promotional vehicle (Wehling

1996, p.171).

Electronic markets also give a low cost for suppliers and manufacturers in

engaging direct links with buyers (Nolle, 2007, p.11). It can reduce the promotional

and advertising costs as well as increase the time effectiveness. Some companies who

tried to promote their products and services through internet have some difficulties

when their potential buyers cannot find their web pages. This obstacle may disturb the

company sales target achievement. As the solution, companies can use the promotions

that inform the companies’ web site addresses (Lee, 2003, p.306).

Moreover, there are some opportunities and challenges for companies to sell

their products through internet. Sellers in the electronic market can give more options

of products rather than in the physical market as well as details of product information

(Evans & Wurster, 1999, p.84). Sellers can also design and manage the web site

content so that the potential buyers can make one-stop-shopping and find the product

they need in effective way.

In digital market, product branding will still become the important part in

internet marketing (Allen & Fjermestad, 2001, p.18). Moreover, the new visitors tend

to search the products’ information based on the brands or logo that are familiar to

them (Quelch & Klein, 2006, p.70). It means that most of the customers still rely on

previous experience of buying and using the products (Quelch & Klein, 2006, p.70).

Thus, the trust to the products is the significant factor in buying decision (Quelch &

Klein, 2006, p.70)

In order to introduce product branding, web marketers should be able to utilize

consumer information to produce substantial value for the potential buyers. Taylor

and England (2006, pp.77-85) proposed the better way for web site design. They

introduce two methods of web site design; first, the web site content ranking which

puts the most required website contents higher in web site display, and second, web

site content grouping which gathers the similar web site content in the same place

(Taylor & England, 2006, pp.77-85). For marketing purposes, the main purpose of

this method is to increase the accessibility and prominence of the web site that may

lead to the higher sales of products (Taylor & England, 2006, pp.77-85).

However, promotion in digital market has some limitations. Consumers do not

always give the requested information to the companies through internet marketing



because of the privacy concerns (Allen & Fjemerstad, 2001, p.18). The other

limitation is the cultural issues. If the companies failed to include the cultural

characteristics in doing promotion through the internet in a country, then the adoption

of product knowledge will be slow (Gong, Li, & Stump, 2006, p.69). Another

difficulty in promoting new products is the high switching costs in electronic market.

As examined in the previous sections, the higher the switching costs, the less likely

the customer will move to the new products. Therefore, companies must have the

clear defined objectives which are integrated in the company strategy in doing

promotion through website unless they will hard to achieve the commercial goal of

the website (Tiago et al., 2007, p.138)

Overall, we find that by using the internet in its promotion and marketing

strategy, companies can potentially increase their sales as well as market share. From

buyers’ perspective, they can select the most suitable product as their needs and

preferences.

3.5. Customer Relationship Management

Customer Relationship Management (CRM) is essential for corporations

because it can increase customers’ loyalty through building one-to-one relationships

and aid the profitability of a corporation (Turban et al. 2008). In order to build this

relationship, a firm needs technology to keep interacting with its customers

personally. Internet technology, a communication technology in digital market to

connect groups of sellers and buyers together (Papazoglou & Ribbers 2006), which

can bestow great impacts on the interaction between sellers and buyers, is more likely

to improve their relationship. In digital market, sellers are able to share the

information about their goods and services through internet and buyers are also able

to learn about products before buying them (Rappa 2007).

In contrast, according to Reicheld and Schefter (cited in Chaffey p.330), it is

costly to obtain online customers, because firms will spend around 20 to 30 per cent

of their budget higher compared to conventional one. They also state that corporations

may find it difficult to yield profits in a period two to three years at the beginning of

their business. This finding, however, presents that corporations will be able to

increase their profits from 25 to 95 per cent if corporations can maintain even merely

5 per cent those customers (Reicheld & Schefter, cited in Chaffey p.330). If



corporations are able to make customers loyal, these customers will speed up their

profitability compared to the conventional businesses due to less costs to service these

customers (Reicheld & Schefter, cited in Chaffey p.330).

Srinivasan, Anderson, and Ponnavolu (2002, pp.42-45) propose some business

factors (8Cs) that influence the cutomers’ loyalty in the digital market as follow.

(1) Customization. It is the ability of buyers to adapt products and services as well

as transactional environment to individual buyers.

(2) Contact interactivity. This refers to the activities between buyers and sellers

through their websites.

(3) Cultivation. This is the level in which a seller gives the relevant information

and rewards to its buyers with the purpose to lengthen their purchases over

time.

(4) Care. It refers to the positive awareness from a seller to all the stages of

purchasing in order to maintain a long-term customer relationship.

(5) Community. Community means an online community that consists of existing

and potential buyers. In this community, sellers organize, facilitate, and

maintain the information exchange related to the offered products and services

in internet.

(6) Choice. Sellers in the digital market can offer more categories of products and

services rather than in the conventional one.

(7) Convenience. Convenience refers to the level of the buyers’ satisfaction on

using the website due to its user friendly and simplicity.

(8) Character. The attractive display of a website can positively affect the sellers’

image in potential buyers’ view.

According to Strauss, El-Ansary, and Frost (2003), customer relationship

management is the process of relationship of obtaining not only final consumers

(B2C) but also business customers (B2B), maintaining them, and developing these

consumers for long time period. In the digital market, firms use database-driven

websites to apply personalisation and customization technologies. Strauss, El-Ansary,

and Frost (2003) point out that the basic role of the personalisation is to greet

customers’ names once they are online, which is easier than the customization’s role.

Customization is more difficult to implement because it changes the content of a site

in order to match the preferences of a user (Strauss, El-Ansary, & Frost 2003).



Furthermore, Renner (cited in Strauss, El-Ansary, & Frost p.424) states that these

technologies enable firms to increase their profit as they are able to identify their

high-value customers, who buy products more frequently and spend their money

most.

With respect to obtaining consumers, companies can acquire both business

consumers and final consumers through online (i.e. internet) and offline. A call center

is one of the most essential devices used by firms to deal with customers’ matters.

Turban et al. (2008) point out in the digital market, firms can develop a call center to

the more advanced tools, for examples email and automated response, which are

cheaper and faster in answering customers’ questions, disseminating the confirmation

or the information of a product. In the online market, customers’ information will be

transferred to companies’ databases once these customers visit the companies’

websites, which enable companies to determine customers’ similarities and

differences (Strauss, El-Ansary, & Frost 2003). A firm is also able to provide chat

rooms as the part of its customer service in order to attract new customers and to

develop their loyalty so that they can share their experiences in shopping (Turban et

al. 2008). In addition, according to Bickerton, Bickerton, and Pardesi (2000), firms

should include their addresses, maps, phone numbers, and opening hours on the

internet to reach customer easier. In this case, the internet is also able to encourage

offline channels because some customers are probably interested to see products

directly in showrooms (Bickerton, Bickerton, & Pardesi 2000).

As for maintaining customers, firms should focus on knowing the percentage

of customers’ retention and the percentage of customers’ attrition. Strauss, El-Ansary,

and Frost (2003) suggest that in the practice of CRM, firms are better to eliminate

customers who do not repeat to purchase firms’ products in a period of time and focus

on customers who buy their products frequently. Cisco system, Inc., for example

applies Web-to-live contact center and the collaborative whiteboard, which enable

customers to communicate their problems to Cisco’s workers. As a result, Cisco could

increase the customers’ satisfaction and save $340 million in a year (Strauss, El-

Ansary, & Frost 2003).

With regard to developing consumers, customers’ loyalty is essential to

increase corporations’ performance for a long time period (Ghosh 1998, cited in

Strauss, El-Ansary, & Frost p.406). Companies are able to build customers’ loyalty if



they can communicate and collaborate with specific customers continuously to attract

and satisfy them. In addition, customers would have positive image about products

and services offered if they are interested and satisfied with those products and

services in internet. Thus, it may encourage them to buy more frequently.

Overall, we find that applying CRM in electronic market may not earn profit

in corporations’ short term performances (approximately during the first two to three

years). However, organizations should start considering their CRM in digital market,

because it assists them to improve customers’ loyalty which may also result in

improving their profitability for long term.

3.6. Ethics in the Digital Market

Other issues related to the electronic market is ethics, particularly privacy,

trust, and security. The ethical issues in digital market are new species of generic

moral problems. This is true when it comes to online communication as in any other

area of computing. The generic problems are privacy, property, the line between

individual freedom, and public private authority, respect, and responsibility (Gurak

cited in Johnson, 1997, p.61).

All of the above things show that ethics is an important part of doing e-

business. However, ethics is not easy because the availability of the ethical resources

to the ordinary person is rapidly fragmented, distributed and ambiguous (Introna,

2002, p.72). In the digital market, it is common that companies buy information about

individual, personal details, and shopping habit which can be considered as unethical

acts (Leitch & Warren, 2001, p.56). Thus, in this section we discuss the ethics in

digital market particularly privacy, trust, and security.

3.6.1. Privacy In the way of digital market use, the privacy is the most publicized ethical

issues. Privacy becomes a major concern for both consumers and enterprises in the

digital market. Information about customers can be leaked out in all the processes of

buying goods at e-commerce stores (Tan & Guo, 2005, p.217). Many research

efforts have been devoted to the development of privacy protecting technology (Byun,

Bertino & Li, 2005, p.102). Privacy in particular is a notion that has sparked much



interest and sometimes causes alarms to be raised, especially when reports of privacy

violations are cited in the popular media.

The privacy issues come from the idea to gather the information about buyer

and seller that that will improve relationship between buyer and seller (Medley et al.

1998, p.62). Thus, in the United States, the code of ethics is more focus about privacy,

for example the intentional interception of the electronic communication is prohibited

(McCauley, 1997, pp.110-114). However, some customers loose their personal data

when being collected and used in improper way by companies (Jensen, Potts &

Jensen, 2005, pp.206).

3.6.2. Trust In the real world, the good relationship between buyers and sellers is

depending on trust (Cazier, Shao & St.Luis, 2006, p.718). Customer’s trust in the e-

marketplace will be fostered by both the market-maker and seller in comparison with

the e-marketplace where trust is built by only the seller who plays a role of a market

maker at the same time (Kim & Ahn, 2005, p.195). Trust is the most simply

consideration when customers decide to interactive with the providers. Trust, in

general, is an important factor in many social interactions, involving uncertainty and

dependency (Einwiller et al., 2000 and Einwiller & Will, cited in Grabner-Krauter,

Kaluscha, 2003 p.784 ). Trust can serve as the instrument to reduce the complexity of

human conduct in situations when people with uncertainty (Luhmann, 1989 cited in

Grabner-Krauter, Kaluscha, 2003 p.784). Lack of trust is one of the most frequently

reasons for consumers who not purchase in electronic market (Grabner-Krauter,

Kaluscha, 2003 p.783).

Consumer’s trust to digital market is affected by many factors, such as

technology, ethics, policy environment, enterprise reputation. Under this condition,

the target of trust and the forms of trust are both different. It is suggested to trust

network technology, online store and online products except for trusting person

(Zeng, Zeng & Guo, 2005, p. 221-225).

According to Shaw’s structure, there are four entities in digital market into

buyer, seller, third party and technology (Bellman et al., 1999 cited in Yang, Hu &

Chen 2005, p.188). In the part of buyer, demographic factors, experience, familiarity,

individual culture, privacy were the key factors that will induce trust (Bellman et al.,



1999 cited in Yang, Hu & Chen 2005, p.188). In the part of seller, brand-equity,

competitiveness, availability, variety and customization were the elements that

determine the trustworthiness of web seller (Fung & Lee ,1999 cited in Yang, Hu &

Chen 2005, p.188).

3.6.3. Security Another ethics issues need to be considered internet users is security. Both

customer and seller in digital market will get beneficial from increasing the security

systems and the trust worthy of online companies because trust is a mechanism to

reduce uncertainly and complexity in electronic market (Grabner-kraeuter, 2002,

p.49). In electronic market, it is necessary for security to be able to verify and

identical parties who doing transaction to make sure that nobody can get benefit from

exchange information and to prevent the disruption of service and application (Tan &

Guo, 2005, p.218). However, many questions about actions with the internet ethics

scopes are unanswered because they are difficult to assume that actions unethically.

It is important to e-commerce participants to ensure consumers’ trust. In the

digital market, people must be revealed personal data, credit card code, and any of e-

signature to dealers. According to that reason, many of e-commerce store owners had

decided to create the internet security to protect their clients’ secrets. Internet security

is trivial; integrity, privacy, and personal conduct are controlled primarily by a social

contract (Krull, 1995, pp.12).

Writing Documentation That Works Potential Impact


4. Potential Impact

The digital market, as discussed earlier, has affected not only the market

dynamic, but also the society, organization and individuals in general level. In this

section, we will present the impact of digital market evolution on the society,

organizations and individuals.

4.1. Impact of Digital Market on Society

The first impact of electronic market to society is to enforce government to

enact law to protect it. The number of business involve in electronics market is

growing continuously. Thus, the first effect of the digital market on society is the

increase need of legal infrastructure. Figure 4 below shows that business that has

access to internet in 2006 increase significantly since 1997 (97). ONS data in 2000,

the second largest used is finding information about goods and services (ONS 2000,

cited in Chaffey, p.123). This growth of electronic market transaction needs legal

protection because the transaction process in electronic market is different with in the

traditional market and there are risks of dispute between buyers and sellers.

Customers, for example, cannot fully protect their information when they make

transaction through the internet. Buyers can sell their customers’ data to other parties

and administrators of web servers can transfer their servers’ logs to other companies

(Tan & Guo, 2005, p.217). Therefore, the first effect of the electronic market is to

enforce government to enact law to protect particularly customers’ rights in that

market.



Figure 4: Percentage of Business with Internet Access

The example of country that provides law is the United States where

regulatory environment is significantly better than in other countries. Inadequate legal

protection was rated high by 11% of respondents, and business laws that cannot

support e-commerce only 8% (Shih, Dedrick & Kreamer, 2005, p.61) In the United

States, the intentional interception of the electronic communication is prohibited

(McCauley, 1997, pp.110-114). By this electronic Act, the clients’ information which

is in the attorneys’ hands should be encrypted by the encryption software (McCauley,

1997, pp.110-114). If the clients’ information is leaked thus endanger people’s

privacy, the lawyer who involves in that prohibited action will be punished under the

code of internet ethic (McCauley, 1997, pp.110-114).

The second impact of electronic market to society is to make market more

competitive. There are several factors that may lead market becoming more

competitive. Firstly, the heterogeneonous consumers, who have different preferences

and needs, in the digital market will enforce supplier to have more variety of

products. Secondly, the lower searching cost for suppliers may help them to identify

the condition of their competitors. Suppliers will find the digital market attractive as

they could use them to reach a wide range of new customers in easier and cost-

effective ways and to find information about their competitors in their market too

(Narin cited in White & Daniel, 2003, p.248). Finally, the lower searching cost for

buyer may also lead to the increase of the competition in the digital market. In

conclusion, the competition in digital market will be more competitive.

Source: DTI, 2000, cited in Chaffey, 2002, p.131



4.2. Impact of Digital Market on Organisations

Digital markets have brought great potential impacts on the operations of the

organisations. Several corporations are able to obtain advantages through digital

markets, yet, other corporations are difficult or even failed to gain the benefits of

electronic markets (Biswas & Krishnan, 2004, p.681). The ‘technological uncertainty’

of obtaining actual advantages in digital market may negatively affect the behaviour

of prospective members of electronic markets, for example buyers and sellers

(Papazoglou & Ribbers 2006). Buyers and sellers tend to wait before joining in

electronic market systems with the expectation that they will be able to learn from

other organisations’ experiences (Papazoglou & Ribbers 2006).

However, Papazoglou and Ribbers (2006) also explain the essential impacts of

digital market on market structure and efficiency as follow:

1. Cost reduction

Digital market can decrease the cost of gaining information, called searching cost,

about alternative suppliers’ products and prices and the advertising cost to

additional customers. The reduction of this searching cost is more likely to

influence competition since corporations, that act as buyers, are able to obtain

better information about their suppliers’ best prices.

2. Network externalities

Digital markets can generate more value for their members since more businesses

link their interorganizational systems.

3. Switching costs

Substantial investment in digital markets, such as hardware, software, employee

training, and the business process reengineering in the organisations, will

probably become useless once their members make decisions to migrate to other

markets. The higher the switching cost, the more reluctant buyers change their

existing suppliers to new suppliers.

In addition, Lancastre and Lages (2006, pp.774-775) claim electronic markets

have influenced firms’ decision to focus on improving their cooperative relationship

with customers. In digital market environment, firms generate communication and

interaction with their customers more frequently through emails, automated

responses, and chat rooms in order to increase customers’ satisfaction as buyers can



share easily their expectations with sellers (Turban et al. 2008). Corporations will also

be able to create customers’ loyalty through these long term relationships (Strauss, El-

Ansary, & Frost 2003).

Furthermore, Song and Zahedi (2005, p.222) state that corporations, that are

able to enter the electronic market, can decrease their geographical boundaries,

transactions and communication costs by making the names of their products,

transactions, and public relations. These costs can be reduced because corporations

can raise communication’s pace and quality with their potential consumers and

suppliers (Song & Zahedi, 2005, p.222). A publisher in electronic market, for

example, is able to reduce the costs of printing, circulation, inventory, and has better

relationship with the customers than traditional publishers (Song & Zahedi, 2005,

p.222).

Overall, we find that even though the technological uncertainty in this

marketplace may negatively affect potential participants’ behaviour, firms which are

able to adapt in this market are likely to increase their profits. It is because firms can

decrease their searching costs. Electronic markets may support firms to build their

relationship with customers and obtain benefits from network externalities.

4.3. Impact of Digital Market on Individuals

The digital market affects not only the whole society and business

organizations, but also individuals as the consumers in the market. Rappa (2007)

argues that buyers in the digital market can have more information about the products

and sellers in more cost-effective way than in the traditional market. Thus, it may

provide not only the more choices of goods, services and suppliers, but also the lower

searching cost of information in the digital market. Regarding those benefits, whether

the existence of the digital market can dramatically attract consumers to migrate to

online market is questionable.



The first important factor that most consumers consider to conduct a business

transaction is price. Both in traditional and digital markets, most consumers always

look for the best price, which is the cheapest one. On the other hand, the difference

between traditional and digital markets is the availability of the easy, convenient,

cheap, and fast tool for searching the price offered among multiple sellers. Kumar,

Lang, and Peng (2005, p.88) argue that digital markets have search engines which

offer for the fast access and customized service at no cost, thus they may reduce the

searching cost for consumers. The lower the searching cost for consumers, the lower

the price (Brown & Goolsbee, 2002, p.482). However, as discussed earlier at section

3.2., we find that the lower the searching cost does not necessarily lead to the lower

price because in most cases, sellers try to avoid the direct price competition by

differentiating their products, which then can charge the premium price to consumers.

As the result, the price level the in digital market will not significantly induce

consumers to choose digital market rather than traditional market.

The other important factor that may influence consumers in choosing the best

channel transaction is the security of their personal data. The easy, fast, convenient

and cheap way of transaction may become meaningless when the security is not

assured. Ho (2006, pp.47-48) states that the valuable personalization and security

system are both required to attract consumers to use digital market. Järveläinen and

Puhakainen (2004, p.340) found that consumers prefer to use the traditional market

than the digital one because they do not believe in the lower cost and the accuracy of

the electronic transaction. We find that in most cases, building trust in consumers

particularly in the inexperienced ones is hard to achieve. Thus, we can conclude that

most consumers still prefer the traditional market than the digital market regarding the

security and privacy issues.

In conclusion, despite the benefits offered by the digital market, consumers are

constrained with significant threats, such as higher prices and unsecured transactions.

Hence, it is likely that fewer consumers will use the online market for conducting

business transaction.

Writing Documentation That Works Conclusion


5. Conclusion

We find that the electronic market is a new form of marketplace, which usea

the internet as its communication infrastructure. Internet is argued to be the

communication infrastructure mainly because it creates new marketplace architecture.

Second, we conclude that the demand in the electronic market is as not elastic as

expected to the price and the significant price dispersion still occurs. This is mainly

caused by product differentiation. Third, we find that overall, switching costs in the

electronic market do not decline even though the searching cost is likely to decrease.

We also conclude that overall, suppliers and buyers should use internet as a

tool to make transaction because internet will support to reduce searching costs for

consumers and advertising costs for suppliers. Companies prefer to improve their

customer relationship management because they want to create customers loyalty and

to increase corporations’ profitability. Furthermore, ethical issue, such as security,

trust, and privacy can influence consumer to be reluctant to make transactions in the

digital market.

The potential impact of the electronic market to individual customers is not

significant because the price in the electronic market is unlikely to decline and it is

difficult to build trust in customer perception. In contrast, the electronic market

provides benefits to organizations because it supports companies to increase their

profit and maintain relationship with their customers. The electronic market also

makes market more competitive because of the heterogeneous of customers and the

decline of searching costs. The growth of the electronic market affects the

government to enact law related to it, since the electronic markets bring more risks

than in the physical market.

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