Ecommerce Chap 12

1© Prentice Hall, 2000

Chapter 12Economics, Global, and

Other Issues in Electronic Commerce


Learning Objectives

Identify the major impacts of Web-based economicsDescribe the major components of Web-based

economicsAnalyze the impact of online markets on competitionDescribe the impacts and industry structure on

intermediationDescribe the role and impact of virtual communitiesEvaluate the issues involved in global electronic

commerceAnalyze the impact of EC on small businessesUnderstand the research opportunities in ECDescribe the factors that will determine the future of

EC


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


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


The Components ofDigital (Virtual) Economics

Digital ProductsInformation 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 toolsSymbols, 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


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

The Components ofDigital (Virtual) Economics (cont.)


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


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


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


Cost Curves

Quantity

Cost perunit

Optimal

Regular Products

Costperunit

Quantity

Digital Products


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


Quality Uncertainty and Quality Assurance

Price is becoming the major factor influencing many Web purchases

Quality is extremely important in many situationsIssue of quality is related to issue of trustQuality assurance by a trusted 3rd party is needed

For example : Trust-e and Better Business Bureau (BBB)


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 satisfiedproviding a guarantee, or a full refund, for dissatisfied

customers is facilitating ECreturns 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


Pricing on the Internet

Price Discovery Electronic marketplaces enable new types of price

discoveryWeb-based auctions at Onsale.com and eBay.comIntermediaries such as Priceline (www.priceline.com)Agents such as Kasbah (ecomerce.medis.mit.edu/kasbah)

The ability to customize products

The ability to price

discriminate


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


Contributors to Electronic Market Success

Product characteristics Digitizable products; low priced items; computers;

electronics, consumer products; and even carsIndustry 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


Impacts on Industry Structure

Seller 1

Seller 1

Seller 1Customer

Product Distribution Network

Market Information Exchange

Information

Product

Traditional Market Industry Structure

Traditional market Customers search out information (about the

products available and their prices, quality, and features) from a wide range of sources


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

Product Distribution Network

Seller 1

Seller 1

Seller 1Customer

Electronic Market

Industry Structure with an Electronic Market

Information

Product


The Roles and Value of Brokers in Electronic Markets

Search costs for finding partners—highLack of privacy; can not remain anonymousIncomplete information; a broker can get

moreContracting risk of refusing to pay, poor

quality products, etc.Pricing inefficiencies, opportunities may be

missed

Limitations of Privately Negotiated Transactions


Potential Winners and Losers in EC

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

Winners


Most wholesalers, especially small onesBrokersSalespeopleNon-differentiated manufacturers

Potential Losers in EC


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


Virtual Communities (cont.)

Ways to transform a community site into a commerce site:

Understand a particular niche industry, its information needs, and the step-by-step process by

which it does the research needed to do business.

Build a site that provides that information, either through partnerships with existing

publishers and information providers or by gathering it

independently.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.



The Expected Payback Customer loyalty increases Increased sales Customer participation and feedback

increases Increased repeat traffic to site Drive new traffic to the site



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


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


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


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


The U.S. Policy RegardingGlobal Electronic Commerce

The private sector should leadGovernments should avoid undue restrictions on

electronic commerceWhere 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


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


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


Success Factors for Small Businesses

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

International products Information


Research in Electronic Commerce

Behavioral Issues Consumer behavior Building consumers behavioral profiles and

identify ways to utilize them Seller’s 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


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


Managerial Research Issues

Advertisementmeasuring the effectiveness, integration and coordination

Applicationscreating a methodology of finding EC business applications

Strategydesigning strategic advantage strategy for ECinitiating “Where to market” strategyfinding way to Integrate EC into organizations

Impactsidentify the necessary organization structure and cultureintegration with ERP and SCM


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


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 softwarecompanies support auctions and multiple types of certifications

EC knowledge the quantity and quality of EC knowledge is increasing rapidly

Ecommerce Chap 12

Education

market prentice hall

conditions prentice

future ofec prentice

entertainment products

substitute products

competitionlower buyers

impact of ec

ec economics