1. Chapter 12
Economics, Global, and
Other Issues in
Electronic Commerce
© Prentice Hall, 2000 1

2. 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 © Prentice Hall, 2000 2

3. 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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4. 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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5. The Components of
Digital (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,
Symbols, tokens and games, development tools
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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6. The Components of
Digital (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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7. 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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8. 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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9. 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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10. Cost Curves
Cost Cost
per per
unit unit
Optimal
Quantity Quantity
Regular Products Digital Products
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11. 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
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12. 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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13. 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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14. 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/kasbah)
The ability to The ability to
customize price
products discriminate
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15. 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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16. 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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17. 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
Market Information
Seller 1 Exchange
Seller 1
Customer
Seller 1
Information
Product Distribution Network
Product
Traditional Market Industry Structure
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18. 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
Seller 1
Seller 1 Electroni
Customer
c Market
Seller 1
Product Distribution Network Information
Product
Industry Structure with an Electronic Market
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19. The Roles and Value of Brokers in
Electronic Markets
Limitations of Privately Negotiated Transactions
Search costs for finding partners—high
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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20. Potential Winners and Losers in EC
Winners
Proprietary network owners Internet access providers
Midsize manufacturers Portal providers
Technology suppliers A few large resellers
Market makers EC software companies
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
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21. Potential Losers in EC
Most wholesalers,
especially small ones
Brokers
Salespeople
Non-differentiated
manufacturers
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22. 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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23. Virtual Communities (cont.)
Ways to transform a community site into a
commerce site:
Understand a particular niche Build a site that provides that
industry, its information needs, information, either through
and the step-by-step process by partnerships with existing
which it does the research publishers and information
needed to do business. providers or by gathering it
independently.
Set up the site to mirror the steps
a user goes through in the Build a community that relies on
information-gathering and the site for decision support.
decision-making process.
Start selling products and services, such as sample chips to engineers,
that fit into the decision-support process.
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24. 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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25. 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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26. 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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27. 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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28. 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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29. The U.S. Policy Regarding
Global 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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30. 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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31. 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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32. Success Factors for Small Businesses
Niche products International products
Small volume Information
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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33. 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
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34. 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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35. 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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36. 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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37. 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
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