Ps26

Info Systems J
(2005)
15
, 321–341
© 2005 Blackwell Publishing Ltd
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Blackwell Science, LtdOxford, UKISJInformation Systems Journal1350-1917Blackwell Publishing Ltd, 200515
321341
Original Article
Business relationships in electronic marketsR Bunduchi
Business relationships in internet-based
electronic markets: the role of goodwill trust
and transaction costs
Raluca Bunduchi
Research Centre for Social Sciences, University of Edinburgh, Edinburgh EH1 1LZ,
Scotland, email: bunduchi@yahoo.com
Abstract.
Transaction costs and goodwill trust, which differentiate between trans-actional
and collaborative relationships, were found in existing research to play a
significant role in the way organizations use internet technologies to manage their
relationships with customers and suppliers within electronic markets (EM). How-ever,
a thorough investigation of role that the two dimensions play together in shap-ing
the use of EM is lacking from the mainstream literature. This research
addresses transaction costs and goodwill trust together to clarify the transforma-tions
that internet use has brought on the nature of interorganizational relation-ships
that develop between EM players. The research finds the use of EM in
collaborative relationships is governed by trade-offs between different outcomes
that different EM functionalities have on organizational objectives. Organizations
assess these trade-offs, and select those functionalities that best serve to achieve
their collaborative relational objectives. In contrast, no trade-offs are find in the
transactional model, as the use of EM here is driven principally by transaction cost
reductions.
Keywords:
electronic markets, inter-organizational relationships, transaction cost
economics, trust
1
.
INTRODUCTION
Some of the first researchers to study the consequences that the use of information technology
(IT) has on the nature of buyer–seller relationships are Malone, Yates and Benjamin in their
seminal article
Electronic markets and electronic hierarchies
(Malone
et al
., 1987). The authors
apply the transaction cost economics (TCE) framework and show that IT use lowers transaction
costs and favours arms-length relationships between economic actors. Following TCE-based
research led to contradictory results regarding the outcome of IT use: Clemons
et al
.’s (1993)
study finds that IT use favours collaborative relationships, whereas Hart and Estrin’s (1991)
study suggests that IT use creates incentives for organizations to internalize their activities.

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A reason for these divergent results is that different types of IT applications can be used
to support different types of relationships (Gallivan & Depledge, 2003; Garcia-Dastugue &
Lambert, 2003). Organizational research differentiates between two types of buyer–seller rela-tionships:
transactional or arms-length relationships, and collaborative or obligational relation-ships.
The former are characterized by low interdependence, short-term commitment,
prearranged terms and conditions in a written contract, narrow communication channels, low
trust and low asset specificity. In contrast, the latter are characterized by strong interde-pendences,
high levels of trust and commitment, long-term span, high transaction costs, terms
and conditions loosely specified and high asset specificity (Sako, 1992; Morgan & Hunt, 1994;
Dyer
et al
., 1998; Lambe
et al
., 2001). Transactional relationships can be seen as economic
exchanges, concerned with the economic exchange of goods and/or services between parties,
whereas collaborative relationships involve economic as well as social exchanges such as
interdependencies, friendships, closeness and trust (Smith Ring & Van de Ven, 1994; Back-haus
& Buschken, 1997; Easton, 1997). As an economic theory, TCE fails to account for social
exchanges such as trust and power, which are considered irrelevant to the study of economic
exchanges (Williamson, 1993). Therefore, while TCE studies can explain for the outcome of IT
use in transactional relationships, they are limited in their ability to account for collaborative
outcomes of IT.
This study addresses a particular type of internet-enabled application, internet-based elec-tronic
markets (EM). This article follows Christiaanse
et al
. (2004) in defining EM as
‘electronic
networks where buyers and sellers meet to engage in buying and selling as well as other activ-ities,
such as collaborative planning, logistics, transportation arrangements and fulfilment’
(p.
152). Such a definition acknowledges that EM are not limited to a matter of buying and selling
(Bakos, 1991), but may also support a range of other functionalities such as supply chain man-agement
solutions, fulfilment and trust mechanisms (Christiaanse
et al
., 2004).
Depending on their core functionality, Markus & Christiaanse (2003) differentiate between
transactional and collaborative EM. Transactional EM provide mainly commerce functional-ities,
such as auctions and electronic billing, which enable members to conduct transactions,
whereas collaborative EM focus on functionalities which facilitate collaboration, such as
shared databases and inventory management. Both types might also provide content func-tionality
that does not generate cash flow, but enhance the EM’s core functionality, such as
discussions forums and event calendar. The authors argue that transactional EM can be seen
as purchasing intermediaries between buyers and sellers and can be analysed within the TCE
framework. In contrast, the TCE approach fails to account for the impact of collaborative EM,
whose core functionality is processes facilitation, not necessarily the mediation of purchasing
transactions.
Consequently, the TCE framework alone is inadequate to fully explain for the outcome of EM
use on interorganizational relationships (Kumar & Dissel, 1996; Kraut
et al
., 1998; Kumar
et al
.,
1998; Christiaanse & Kumar, 2000; Markus & Christiaanse, 2003). Markus & Christiaanse
(2003) suggests that different analytical frameworks are required to address the integration
effect of collaborative EM, and the role of power and pre-existing relationships between actors.
Kraut
et al
. (1998) and Kumar
et al
. (1998) argue that collaboration relational characteristics

Business relationships in electronic markets
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such as trust should be included in the TCE analysis to address EM use in collaborative
relationships.
This article follows the latter recommendations and analyses the collaborative and transac-tional
use of IT in relationships between buyers and sellers through addressing transaction cost
and goodwill trust. The article is structured as follows: section 2 discusses the theoretical foun-dations
of the study and clarifies the transaction costs and trust concepts. The research meth-odology
is presented in section 3. Section 4 describes the role that trust and transaction costs
play in explaining the nature of business relationships between EM players in two case studies.
The research conclusions, limitations and future research are discussed in section 5.
2
.
BACKGROUND
:
TRANSACTION
COSTS
,
TRUST
AND
EM
2.1. Transaction cost economics-based approaches
Research regarding the role of IT in shaping the nature of interorganizational relationships has
predominantly adopted a TCE stance. The reason is that TCE explains such relationships in
terms of transaction costs, where these transaction costs are directly related to IT use (Malone
et al
., 1987).
According to TCE, organizations choose between alternative types of business exchanges
based on the level of transaction costs (Williamson, 1986). Collaborative exchanges are pre-ferred
when transaction costs are high, whereas transactional exchanges are preferred when
transaction costs are low (Clemons
et al
., 1993). Transaction costs are seen as the crucial vari-able
influencing the nature of interorganizational relationships.
Transaction cost economics literature differentiates between two categories of transaction
costs aspects:
1
Transaction costs – defined as
‘the costs of exchanging information and incorporating that
information into decision processes, as well as the costs incurred by the firm due to delays in
the communication channel’
(Clemons
et al
., 1993, p. 15).
2
Transaction risks – defined as
‘the cost associated with the exposure to being exploited in
the relationships’
(Kumar & van Dissel, 1996, p. 292) include operation and opportunism risks.
a. Operation risks are
‘the risks that the other parties in the transaction wilfully misrepresent
or withhold information, or underperform – that is “skink” – their agreed-upon responsi-bilities’
(Clemons
et al
., 1993, p. 15). The existence of high operation risks requires orga-nizations
to closely control and monitor the exchange.
b. Opportunism risks are
‘the risks associated with a lack of bargaining power or the loss of
bargaining power directly resulting from the execution of a relationship, that is, a differ-ence
between ex ante and ex post bargaining power’
(Clemons
et al
., 1993, p. 16). High
asset specificity, few potential partners and loss of resource control as a result of the
exchange generate opportunism risks.
It is generally assumed in the literature that IT use reduces transaction costs. Malone
et al
.
(1987) argue that IT use reduces the time and cost of communication, decreases the costs of

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the product selection process, and allows for a tighter coupling of information processes that
increases the speed, reduces the errors, and allows for better linkages between the buyers and
suppliers’ information systems (IS) which lower transaction costs. This outcome is confirmed
in following studies. Bakos (1991; 1998) finds that searching costs are lower within EM, Hart
& Estrin (1991) note that IT use improves coordination, while Clemons
et al
. (1993) argue that
IT use reduces the costs of explicit coordination.
As according to the TCE framework, lower transaction costs lead to higher reliance on trans-actional
exchanges, some researchers argued that EM use facilitates the development of
transactional relationships between EM players (Malone
et al
., 1987). However, following stud-ies
find that IT use enables more efficient control through better information flow, whereas
higher reliance on open standards reduces the idiosyncrasy of IT investments which translate
in lower operation and opportunism risks (Clemons
et al
., 1993). As these risks are higher in
collaborative relationships, it means that as EM use reduces transaction risks, organizations
have more incentives for collaboration. Following studies confirmed that EM relationships tend
to be collaborative in nature (Steinfield
et al
., 1995; Bakos & Brynjolfsson, 1997; Christiaanse
& Kumar, 2000).
Not all empirical research confirms this collaborative effect of IT use. Hart & Estrin (1991)
find that EM development is associated with high vulnerability costs such as
‘the costs of
adopting specialized procedures, erosion of control over internally generated information’
(p.
376). These vulnerability costs are manifestations of what Clemons
et al
. (1993) call oppor-tunism
risks, i.e. loss of control resulting from specialized investments. Geun Lee & Clark
(1996/97) find that EM lead to higher uncertainties as buyers face the risks of incomplete and
distorted information, and sellers face the possibility that their offers will not be appropriately
valued in an unproved market system. These uncertainties translate in higher opportunism
risks, that obstructs EM adoption (Geun Lee & Clark, 1996/97) and encourages internalization
of activities (Hart & Estrin, 1991).
Figure 1 summarizes these different findings.
Different explanations are advanced in the literature to justify for the different outcomes of
EM use. They include organizational objectives (Garcia-Dastugue & Lambert, 2003), supply
chain characteristics (Christiaanse & Kumar, 2000), and the inability of the TCE framework to
account for the integration effects, the history of pre-existing relationships (Markus & Chris-tiaanse,
2003), and the trust and interpersonal relationships between EM players (Steinfield
et al
., 1995; Kraut
et al
., 1998; Kumar
et al
., 1998; Christiaanse & Kumar, 2000). This article
focuses on the latter explanation and addresses the role of trust in shaping the use of EM in
buyer–seller relationships.
2.2. Beyond economic exchanges: trust and EM
Existing research defines trust as a critical characteristic of collaborative interorganizational
relationship (Morgan & Hunt, 1994; Zaheer
et al
., 1998; Lambe
et al
., 2001). However, TCE
conceptualizes business relationships in terms of transactions between economic actors, char-acterized
by opportunistic behaviour, that is calculative self-interest. In this context, trust is

Information
technologies
Figure 1.
Transaction costs and risks, and electronic markets (EM).
15
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‘warranted when the expected gain from placing oneself at risk is positive, but not otherwise’
(Williamson, 1993, p. 463) and is described as a subclass of risk. Trust based on faith in the
other actors is considered irrelevant to the study of economic exchanges. However, trust was
found as a critical concept to influence the development of interorganizational relationships in
a number of organizational studies (Sako, 1992; Smith Ring & Van de Ven, 1992; 1994; Morgan
& Hunt, 1994; Zaheer
et al
., 1998)
The literature provides two general conceptualizations of trust: risk-based trust, defined as
confidence in one’s expectations about another’s behaviour; and goodwill trust, understood as
confidence in another’s goodwill (Smith Ring & Van de Ven, 1994; Nooteboom, 1996; Pavlou,
2002). The risk-based perspective on trust acknowledges that parties will employ formal con-tracts
to hedge against the uncertainty in the relationship, whereas the goodwill perspective
emphasizes the role that interpersonal interactions between organizations play in dealing with
this uncertainty. Such interpersonal relationships create faith in the moral integrity of the other
party that she will not take advantage of the relationship (Smith Ring & Van de Ven, 1994).
This research follows Nooteboom (1996) and Smith Ring & Van de Ven (1992) in addressing
the role that goodwill trust has in understanding the nature interorganizational relationships.
Goodwill trust can be defined at two levels (Zaheer
et al
., 1998):
1
personal level – trust between individuals.
2
organizational level – trust between organizations.
Transaction
risks
Transaction
costs
Transaction
risks
Collaborative
relationships
(Bakos & Brynjolfsson, 1997;
Christiaanse & Kumar, 2000;
Competitive
relationships
(Malone et al., 1987)
Barriers for EM
adoption
& internalisation
(Hart & Estrin, 1991;
Geun Lee & Clark, 1996/97)
Efficient control,
Better information flow,
Open standards
Increase communication speed,
Reduce communication costs
Reduce the costs of searching
for and selection of products
Increase speed, reduce errors,
Improve the linkages between
partners informational systems
Adoption of specialised procedures,
Erosion of control over internally
generated information
(Hart & Estrin, 1991)
Incomplete and distorted information
and unproven market systems which
increase uncertainties
(Geun Lee & Clark, 1996/97)
–
–
+
(Clemons et al., 1993)
(Clemons et al., 1993; Malone et al., 1987)
(Clemons et al., 1993; Malone et al., 1987)
(Malone et al., 1987)
Clemons et al., 1993)
Steinfield et al., 1995)

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By its nature, trust is defined at the personal level, however, individuals in an organization may
‘share an orientation toward another organisation’
(Zaheer
et al
., 1998, p. 143). The two levels
are closely interrelated:
•
As individuals enact the relationship between organizations, their personal relations become
part of the interorganizational relationship (Gulati
et al
., 2000), and;
•
Interpersonal relations are conditioned by the legal systems and organizational role respon-sibilities
that characterize relationships between organizations (Smith Ring & Van de Ven,
1994).
Triggered by the limitations identified in the TCE framework to deal with the social aspects
of IT use (Kumar
et al
., 1998), as well as by the increasing focus in organizational research in
the role that trust plays in shaping interorganizational relationships (Pavlou, 2002; Gallivan &
Depledge, 2003), a number of studies have begun to address the role that trust, and in par-ticular
goodwill trust, plays in the context of EM relationships.
In general, existing research converges on the belief that EM affects significantly the level of
trust between the actors involved (Luo, 2002; Gallivan & Depledge, 2003), although only few
such studies differentiate between goodwill and risk-based trust (Pavlou, 2002; Ratmasingam,
2005). Specific institutional mechanisms such as cooperation norms and accreditation were
found to support goodwill organizational trust in internet-based EM (Luo, 2002; Pavlou, 2002).
Luo (2002) argues that EM also sustains personal trust through online communities and other
linkages between strategically allied companies. Security services such as confidentiality and
authentication mechanisms embedded in EM are also shown to support goodwill (Ratmasin-gam,
2005) interorganizational trust development (Srinivasan, 2004). Based on an extensive
analysis of existing studies regarding the relation between IT use and trust in interorganiza-tional
relationships, Gallivan & Depledge (2003) conclude that the use of such technologies
can enhance trust between EM players, but such outcome depends on the type of IT func-tionalities
used. The study suggests that whereas open sharing of confidential information sus-tains
trust development, one-sided information flow, e.g. (i.e. monitoring the other party), leads
to low levels of trust.
Trust was also shown to influence IT use (Meier, 1995; Hart & Saunders, 1998). Hart and
Saunders’ study (1998) finds that trust alleviates the risks that the other party will take advan-tage
of the information exchanged in the relationships. Soliman & Janz (2004) find that with the
advent of internet, trust remains a significant variable influencing the adoption and use of inter-organizational
systems. Such a finding is confirmed in other studies that find that organizations
are more likely to engage in internet-based exchanges with trusted parties (Vlosky
et al
.,
2000). However, none of these studies differentiate between the various types of trust.
In conclusion, trust literature argues that there is a two-way relation between trust and
EM use, although it is not always clear which type of trust do the findings refer to (Gallivan
& Depledge, 2003). As trust supports collaborative relationship (Lambe
et al
., 2001), it
appears that collaboration is a prerequisite for EM use, and can be reinforced through the
use of such technologies. Based on existing literature, this argument is summarized in
Figure 2.

TR US T
(Cooperative norms,
accreditation, feedback)
(Luo, 2002; Pavlou, 2002)
Online communities;
linkages between
allied organisations
(Luo, 2002)
(reduces Depledge
vulnerability)
In fo rmatio n
(Hart & Saunders,
te c hno lo gi es
1998; Meier, 1995;
Soliman & Janz, 2004;
Vlosky et al., 2000)
In st itutio na l me chanis ms
Open info rmation sharin g
( Ga lliv an & D epl ed ge, 20 03 )
One si de d inform at io n flow
Figure 2.
Trust and the use of electronic markets.
Se cu ri ty se rv ic es
( Ra tn as i nga m , 20 05 ;
Sr in iva sa n , 2 00 4 )
TR US T
+
–
( Ga lliv an & D epl ed ge, 20 03 ) TR US T
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Co lla borativ e
re la tions hi ps
( Ga lliv an & , 2003 )
Co mp et it iv e
re la tions hi ps
( Ga lliv an & Depledge , 2003 )
Existing research suggests that both transaction costs and trust play a significant role for the
way EM are used between buyers and sellers. However, whereas some TCE-based studies
suggest that goodwill trust has to be included into the analysis to clarify the outcomes of EM
on the nature of interorganizational relationships (Kumar
et al
., 1998; Christiaanse & Kumar,
2000), there are no empirical studies in the mainstream literature that address these dimen-sions
together. Moreover, research on trust in EM, with a few exceptions (Pavlou, 2002), does
not differentiate explicitly between goodwill and risk-based trust, and even then, it does not
address the personal and organizational dimensions together.
This research addresses the role that transaction costs and goodwill trust have in explaining
the outcomes of IT use on the nature of relationships developed among EM players. The
research methodology that guided the empirical research is discussed in the next section.
3
.
RESEARCH
METHOD
The empirical research follows a qualitative multi-case study research design. The choice was
based on the following rationales.

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First, the notion of ‘trust’ is multi-dimensional and difficult to measure, leading to its different
conceptualizations in IS empirical studies (Gallivan & Depledge, 2002). As case studies focus
on in-depth analysis (Stake, 1995), they enable the researcher to explore the complexity of the
‘trust’ concept. Second, this research understands technology as a social construct (Russell &
Williams, 2002) shaped by the organizational context in which it is used (Ngwenyama & Lee,
1997). Case study design approaches enable the researcher to capture and understand the
social and organizational context in which the phenomenon – the use of EM – occurs (Hussey
& Hussey, 1997). Finally, following Stake (1995), the focus of this research is to search for hap-penings
and not occurrences. The thrust of the study is to understand the phenomenon – the
use of EM in relation to transaction costs and trust – without necessarily looking for the sta-tistical
representation of the findings. This focus influences both the ontology of the research
as the phenomenon cannot be abstracted from the subjective interpretations of the people who
experienced them, and the research epistemology as the researcher sees herself as part of the
social constructed reality, and believes that understanding the meanings that participants place
on their experiences requires interactive discussions between herself and the participants.
Qualitative case studies fulfil both requirements, as approach reality as socially constructed by
the people involved (Creswell, 1994), and enables the researcher to interact with the respon-dents
to capture their meanings and experiences (Stake, 1995).
One of the common critiques of the qualitative case study design is the extent to which the
findings are generalizable to populations or universes (Yin, 1994). Two arguments against this
critique are explored here. First, case studies are generalizable to theoretical propositions and
not to populations in the sense that case studies do not (aim to) represent a ‘sample’ of the total
population. The aim of the investigator is to understand a particular issue (Stake, 1995), and
not to enumerate instances in which a particular theory holds true (Yin, 1994). Second, often
quantitative approaches are themselves unable to explain the limits to the domain of gener-alizability
from their empirical findings. Russell & Williams (2002), e.g. argue that large-scale
surveys can run to risk to inappropriately group different phenomena on the basis of features
that are not necessarily the most significant.
Two unrelated organizations are included into the study, as shown in Table 1:
The selection of the cases follows the intensity criteria (Miles & Huberman, 1994). At the time
of the study, internet-based EM were relatively a recent phenomenon and their use is not wide-
Table 1.
Overview of cases
Characteristics OrgA OrgB
Industry Petroleum Energy
Role Consultancy Multi-utility
Size Large Large
Respondents Strategic Architect (SA); Customer
Web team member (CW); Manager
in Organizational Development (MOO)
Supply Chain Manager (SCM),
General Manager (GM), Product Manager
(PrdM), IT consultant (ITC),
Director of System Integration (DSI)

Table 2.
Interview guide and research objectives
Interview guide Research objective
What are the key internet applications used to support customers
and/or suppliers relationships?
Identify the use and key functionalities of the
EM.
Are they used to the same extent with all types of partners? Explain
the differences. Are there different levels of using these
technologies in terms of access, amount of information,
customization?
Identify the characteristics of EM applications.
Explain how/if their use varies depending on
the characteristics of business relationships.
What are the reasons for the existence of these differences?
Are such differences related to interpersonal relationships,
confidence in the other party, communication costs, or the risks
involved in the transaction?
Which are the main advantages/disadvantages in using the EM
applications? Are these related to trust, cost reductions or
transaction risks?
Identify the outcomes of the use of EM
applications on the level of trust, transaction
costs and risks.
EM, electronic market.
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spread (Leek
et al
., 2003). It was assumed that leading companies would have not only the
financial resources to acquire such technologies, but also that the expectations of their part-ners
regarding EM adoption will be higher for them. Therefore, the cases were selected among
the leading organizations in their industries assuming that in such cases EM usage would be
most intensive, thereby providing rich information.
Data collection was based on semi-structured interviews complemented with documenta-tion,
which, following Remenyi
et al
. (2000), was primarily used to set the context for the inter-views.
The interview guide followed a loose structured format, with open-ended questions that
were intended to stimulate the respondents to reflect on their experiences in using the EM
across different partners. The questions were mapped onto the research objectives, as shown
in Table 2.
Data validation was ensured through next day respondent validation, and through data tri-angulation.
The information obtained during the interviews was checked, where possible, with
the data gathered through documentation, and with the data provided by other interviewees.
As this study seeks to combine two theoretical insights (TCE and trust) rather than to focus
on the description of a case, ‘relying on a theoretical proposition’ was chosen as the strategy
for data analysis. Data analysis begun gradually as the interviews proceeded. The approach
allowed for a gradual refinement of the interview guide as new relevant topics appeared during
the analysis and of the list of codes as the tentative conclusions were tested against new evi-dence
(Miles & Huberman, 1994; Stake, 1995).
Categorical aggregation (Stake, 1995), or what is called ‘open coding’ in grounded theory
(Strauss & Corbin, 1990), was used to reduce the data. Coding started with a provisional list
of codes created prior to the fieldwork based on the literature review. These codes are labels
attached to chunks of data from the interviews, which serve to assign units of meaning to the
information compiled during the study (Miles & Huberman, 1994). The initial list included two

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330
broad categories: (1) concepts regarding EM applications such as extent of use and type of
exchange, and (2) concepts concerning the nature of relationships such as personal and orga-nizational
trust, communication and coordination costs, operation risks and opportunism risks.
Based on these codes, descriptive data displays were generated to explore the relation
between EM use and the nature of interorganizational relationships. For example, conceptual
clustered matrix were developed to explore the linkages between EM use and the nature of
interorganizational relationships. Table 3 described one such matrix developed to map the out-comes
of EM use on transaction costs and trust for OrgA.
Such descriptive matrix displays served two purposes. First, they allowed an in-depth explo-ration
of the phenomenon (the relation between EM usage and the level of trust and transaction
costs). Second, displaying the data in a structured and organized fashion helped the
researcher to better comprehend the phenomenon. Based on this improved understanding, the
researcher was able to gradually refine the list of codes. For example, the level of customiza-tion
of the EM applications was added to the EM concepts category as it recurrently appeared
to reflect different usages of EM in different types of relationships.
Table 3. Conceptual clustered matrix illustration
EM
outcomes/type of
relationship
Bronze (low
transaction costs,
organization trust
present)
Silver (medium transaction costs
and organizational trust)
Gold (high transaction costs and
organizational trust)
Transaction costs Replace offline with
online interaction (–)
Replace offline with online
interaction (–)
Replace offline with online interaction
(–)
The registration and
administration of EM
applications is done by the
client, not by OrgB (–)
The registration and administration of
EM applications is done by the client,
not by OrgB (–)
EM applications are highly customized
to the gold customers’ requirements
(+)
Transaction risks None None High customization of EM applications
increases customers’ switching costs,
and improves OrgB’s bargaining
position (–)
Organizational
trust
None EM applications support
confidential information
exchange with the customer (+)
EM applications support
confidential information exchange with
the customer (+)
The use of EM supports transparent
service delivery to customers (+)
Personal trust Replace offline with
online interaction (–)
Replace offline with online
interaction (–)
Replace offline with online interaction
(–)

331
The descriptive data displays were followed by explanatory data displays, which served
to identify relationships among the different variables, and eventually led to conclusion
drawing and verification. The explanatory data display used was causal networks. Causal
network are techniques that map the relationships (arrows) between variables (nodes) in
the study, where such relationships imply causality rather than just correlation (Miles &
Huberman, 1994). Casual networks served to explain the relations between the emerging
codes.
Following Miles and Huberman’s recommendations (1994), ‘noting patterns’, and
based on these patterns, ‘identifying relations between variables’ were the first steps
in building causal networks. For example, during the first case, the use of EM was
frequently associated with relationships involving high transaction costs. According to
the interviewees, the same pattern appeared: to develop and then use EM to medi-ate
the transactions with other parties required high set up costs. In order for the
organization to accept such costs, high costs savings had to be achieved through the
use of EM in those transactions. Because the use of EM was seen as reducing
the costs of information sharing between organization, such costs saving would be
higher where there is a high level of interaction going on between the organization,
i.e. high transaction costs. Such pattern emerging through the data supported the
drawing of the first tentative links in the causal networks. In situations in which the
relations between two variables could not be precisely explained, for example between
the use of EM and the duration of business relationships, ‘finding the intervening vari-ables’,
that is the switching costs associated with EM use which explain why the par-ties
prolong the relationship, was a useful tactic to develop the links in the network.
As causal networks were constantly refined, tentative conclusions could be developed
for each case.
The tactic used to bring together all the patterns and relations identified across the three
cases, and to develop the conclusions was ‘building a chain of evidence’, as suggested by
Miles & Huberman (1994). For example, the choice to use EM and the level of trust between
the parties appeared to be related in both cases. Figure 3 describes the causal network built
to explain this relation.
The logical chain was constructed gradually as the analysis progressed and the causal net-works
were successively compared against the new evidence and refined as a result. At each
step in the cases’ analysis, the links were verified as following interviewees were asked to
check them. Such constant verification and refining were facilitated by the flexible approach to
data collection which allowed new questions to be added and new topics to be explored during
the interviews.
Following Miles & Huberman (1994), casual networks narratives were developed to
verify that the interpretation obtained from the casual network is plausible. The narra-tives
helped to identify and explain the context, to describe the casual relationships
mapped onto the network, and to explain why the variables are chained as they are.
These narratives led to the development of the case outputs that are described in the
next section.

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Figure 3. Electronic markets
(EM) use and trust.
Open communication
between the parties
(such as through
discussion forums)
• The existence of trust positively
Sharing confidential
information (such
product information)
Explanation
influences the use of EM
between organisations as it
reduces the risks that the other
party will behave
opportunistically and take
advantage of the information
exchanged. At the same time, if
EM is used to share confidential
information, and to support open
communication, then it creates
confidence in the other party
thus facilitating trust building. In
this way, the directions of
influence among variables, i.e.
trust and EM use, were identified
and explained.
Characteristics OrgA OrgB
Role Supplier of consultancy services for the
Supplier of energy services for business
and home customers
Ownership OrgA OrgB
Functionalities Information services such as industry news and white
papers, event calendar, generic discussion forums,
newsletters
Information services such as industry news
and white papers
Catalogue and consulting services and dedicated
message services, shared databases
Electronic billing, internet invoicing,
data visualization and analysis tools,
data forecasting
Time in use 5 years 2 years
332
EM use
EM
USAGE
-
Fear that the other
party will take
advantage of the
information exchanged
through the EM
TRUST
BUILDING
Table 4. Electronic market’s characteristics
petroleum industry
4. CASE STUDIES
as a dvance
The characteristics of EM applications and the type of relationships included in the study are
described in Table 4.
The use of EM and their outcomes on the nature of customer relationships is explained in the
following sections.
4.1. OrgA
OrgA is a service company part of one of the leading groups in the petroleum industry. OrgA
offers technical consultancy services ranging from providing the technology for extraction and
exploration to developing the software for oil trading operations. Although the company was

333
created in order to expand the parent company’s research and technical consultancy market,
the majority of OrgA’s customers are the parent group’s operating companies.
OrgA differentiates between their customers based on their belonging to the parent group
(internal vs. external customers), and the duration and financial value of their contract. In gen-eral,
internal customers are ‘high value companies’ with whom OrgA ‘has the biggest con-tracts’,
and who are ‘highly profitable’. Such customers are labelled as ‘large customers’ with
contract running a number of years, in contrast with the ‘small customers’ which are in general
external customers, with a smaller financial contract, generally running out within one year.
Although smaller in the financial value of their contract, external customers play a central role
for OrgA because they allow the company to leverage the various products of parent group’s
operating companies across a larger market, and thus reduce the costs and increase the effi-ciencies
in their operations. According to the interviewees, to attract smaller customers was
one of the strategic drivers that led to the creation of OrgA:
[OrgA] was created in order to reduce the cost overheads by offering the opportunity to sell
the technical skills provided by the company’s different business groups to a larger market.
. . . from the products that the business groups have developed for large customers, we can
take individual components that can be sold to smaller customers. In this way we can
increase the market without increasing the costs. (SA)
Part of the initiative to increase efficiencies while improving customer relationships was the
development of an EM to support the delivery of consultancy services to internal and external
customers alike. The services are delivered by selling to the customers a number of licences
that are rights to access a particular service over the EM. There are three types of licences
depending on the type of EM functionality provided to customers, as illustrated Table 5.
Table 5. Services delivered over EM
Type of licence Target customer Services offered
Bronze licences Small customers Generic content functionality tailored to the generic requirements of a particular
market sector. Services include: access to a generic library, newsletters, open and
generic discussion forums, OrgA promotional information and a generic list of
contacts within OrgA.
Silver licences Small customers Similar content functionality as for the bronze licence, but which is customized to
the requirements of individual customers. Such customized services include
access to the customers’ own customized libraries, to their own list of OrgA
contacts; and access to and OrgA expert which can provide confidential advice
through messaging services.
Gold licences Large customers In addition of the customized information services, at this level the EM provides
collaborative functionality tailored to the specific needs of individual customers.
The information from the customers’ databases is stored within online
applications, which means that OrgA is able to review most of the data remotely,
and deliver the service to such customers online through the EM

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334
Bronze licences are usually acquired by small customers whose contract with OrgA has
ended, but who are still interested in the information services provided by OrgA.
According to the interviewees, the major benefit of using the EM application is that it
improves the coordination of customer relationships. Through providing online functionalities
such as remote consultancy services, message services and shared databases, the EM
speeds up the exchange process and decreases communication costs. Faster and cheaper
communication and coordination leads to lower transaction costs. For example, the use of
shared databases means that most of the consultancy work is conducted remotely. Remote
work speeds up the delivery of customer services, and reduces communication and coordi-nation
costs, as described in the following example:
for a consultant to review all the data from a plant it took 5 days. Besides, the need to
have the consultant on the site represents a big overhead for us, and being able to do
this process remotely means reducing this costs overhead not only in terms of reducing
the travel costs, but also in terms of a more efficient use of time for the consultant. Dur-ing
this time, the consultant can also work simultaneously for somebody else, while being
at the customer’s site means that during that 5 days he can work only for that customer.
(SA)
Whereas online interaction generally improves coordination, the delivery of functionalities
such as shared databases and customized discussion forums increases maintenance costs,
adding to the overall information processing costs. Nevertheless, customization is required in
order to increase large customers’ switching costs and thus to restrict their choice of potential
suppliers. According to one interviewee:
the use of the applications will be embedded in the customer’s process: so even if the com-petitors
will have the same applications, will be difficult for the clients to switch the applica-tion.
The gold licences will allows us to own representation of the customer data [so it] will be
difficult for the client to switch to another competitor. (SA)
Higher switching costs restrict the large customers’ choice of potential suppliers. As OrgA
‘own representation of the customer data’, it finds itself in a better bargaining position in fol-lowing
negotiations, which translates in lower opportunistic risk for OrgA. However, whereas
opportunistic risks are lower for OrgB, they become higher for customers because of the
restrictions in the number of potential suppliers. Additionally, collaborative functionalities such
as shared databases enable OrgA to gain tight control over the information flows with the cus-tomer,
hence reducing the operation risks associated with a misrepresentation or withholding
of information.
The reduction of communication and coordination costs is done at the expense of personal
trust. Remote work through online consulting services, e.g. reduces the amount of face-to-face
communication, hence social exchanges between OrgA and its customers. The interviewees
emphasized this outcomes as a significant concern for OrgA, because the lack of personal
contact with customers hinders the development of personal trust that has negative outcomes
for quality of the overall customer relationship. Nevertheless, the interviewees stated that the

335
customers accept the reduction in personal contact because the EM use increases their oper-ation
efficiency as well. As described by one of the interviewees:
The disadvantage of the [EM] is that the customers perceive that there will be less face-to-face
contact [and] the customers will get less personal contact […] but in any case they usu-ally
phoned the operating companies representatives, which routed them to the expert who
usually answered the customers’ inquiries later in the week when he had time. On the Cus-tomer
Web, the access is 24 h per day, so it is a much more efficient tool at directing ques-tions.
(CW)
Although reducing personal trust, the use of EM enables OrgA to support organizational
trust development. First, by using customized content functionalties, OrgA uses EM to
exchange confidential information with the customers, hence building customers’ confidence in
the organization. Second, organizational trust development is facilitated by using the content
functionalities of EM such as discussion forum which enable transparent service delivery.
According to the interviewees:
each service failure will contribute to decrease the customers’ trust in the channel, so in
order to increase [customers] trust we need to make sure that the channel is a transparent
as possible. The transparency is sustained by the existence of discussion forums. (CW)
Discussion forums enable customers to communicate between themselves and with OrgA
thus increasing the transparency in the relationship and building customers’ confidence in
OrgA’s good faith, which can compensate for the negative outcome of a service failure. This is
an illustration of risk-based trust: any service failure undermines the risk-based trust, i.e. the
confidence in the ability of the partner to comply with its promises. However, goodwill trust
based on confidence that the partner acts in good faith, even if he errs, can compensate for a
decrease in the risk-based trust. In conclusion, EM has a range of outcomes on transaction
costs and goodwill trust: in reduces personal trust but it increases organizational trust, reduces
transaction cost while at the same time increasing them to enable opportunism risks reduc-tions,
and finally reduces operation risks.
4.2. OrgB
OrgB is a integrated multi-utility company, including gas as well as electricity businesses
(although the former is significantly lower in terms of revenue than the latter), and participating
in all four activities in the energy supply chain: generation, transmission, distribution and sup-ply.
This study focuses on the electricity group, and the use of EM in their customers relation-ships.
For the purpose of this study, customers are defined here as the end customers, i.e. the
consumers of electricity such as plants, hotels and households.
OrgB classifies its customers based on the financial value of their contract, i.e. their energy
consumption. Residential customers include home and small businesses customers with an
energy consumption less then 1 MW per year. Large business includes customers with an
energy consumption higher than 1 MW per year.

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336
In an effort to achieve cost savings, OrgB set up the EM to support payment and deliver elec-tricity
services with both residential and large business customers. The services delivered over
EM depend on the type of customer, as illustrated in Table 6.
OrgB emphasizes cost savings as the principal outcome of using the EM with both residen-tial
and large business customers. As one respondent mentioned:
At the end of the day, the whole scope of the technology is to reduce costs, either by reduc-ing
personal contact, which unfortunately means less people, or by allowing the company to
move quickly, and achieve more flexibility. (GM)
Cost reductions are achieve through functionalities such as electronic billing and internet
invoicing services which significantly reduce paper- and phone-based communication costs,
while at the same time reducing the number of personnel dealing with customers. These reduc-tions
are illustrated by the following response:
the [EM] produces cost savings: it reduces the cost to serve the customer. For the online cus-tomers,
we don’t send any paper bill anymore, all the correspondence is done online. So
there are the cost savings for the paper billing. . . . All the benefits come from the cost sav-ings,
not only paper, but also the reduction in the personnel that deals with the customers.
There is no need for so many people anymore to answer the phone, or look for information,
as everything is handled online. (PM)
Electronic market commercial functionalities such as electronic billing and internet invoicing
enhance the transparency of service delivery enabling online customers to check the level of
their energy consumption whenever they want. They can also pay the bill online whenever they
choose during a quarter, rather than having to wait for OrgB to issue the bill at the end of the
quarter. This reduces customers’ misunderstandings regarding the amount of energy con-sumption,
which according to the interviewees is commonplace when the customer receives a
paper-based bill. As these misunderstandings represent that largest part of all communication
Table 6. Electronic market functionalities in OrgB
Type of customer Services offered
Residential customer Offers primarily commerce functionality in the form of online billing which allows the customer to
create and pay the bill online.
It provides limited information services such as contact information.
Large business Internet invoicing which enables customers to analyse the invoices online or download the
information directly into internal systems.
Peak demand forecast which provides customers with predicted demand forecasts during the
winter months (November – February). This enables the customers to identify periods of
expected high demand and potentially high charges.
Data services which provides information visualization, analysis and standardized report tools
to the customers.
Content functionalities such as demos, contact information, industry news and papers.

337
between customers and OrgB, the use of EM means not only cheaper communication
(because online communication is cheaper than paper- and phone-based communication), but
also less communication between OrgB and its customers that further reduces the communi-cation,
and improves coordination. As described by one respondent:
[online customers] can create the bill whenever they want. They don’t have to wait 90 days,
which is the time it takes us to send out the bill to paper-based customers. The [energy] con-sumption
is much more visible for them online. Online customers can also phone or send us
an e-mail if they have any questions . . . [there is] less communication than with offline cus-tomers.
The type of messages that we have with online customers is if something is not
working, or if they want to change something, but the rest of the problems are avoided with
online customers. (PM)
In contrast with OrgA, no evidence was found in this case of an increase in the level of trans-action
costs as a result of EM use. One explanation may be the limited experience with the
deployment of EM, as EM was launched by OrgB only 2 years ago.
As mentioned by one respondent, whereas commerce functionalities such as electronic bill-ing
enable less and cheaper communication with the customer, and ease the coordination of
the overall relationship, it also reduces personal contact that inhibits personal trust develop-ment.
Personal trust requires social exchanges between the parties involved in a relationship,
and such exchanges are more likely to happen over the phone and face-to-face than through
online communication (email). As the respondents argued:
E-mail doesn’t let you build a personal relationship, or develop trust in the person you com-municate
with. (RMTM)
Whereas in the case of residential customers such social exchanges were already limited
(because only phone- and paper-based channels were open to them), the decline in social
exchanges is higher for large businesses customers who were dealt directly and personally by
an OrgB representative.
None of the functionalities provided through the EM support (or inhibit) organizational trust
building. No evidence was found to suggest that OrgB is concerned with or attempts to support
goodwill trust through the use of EM. At the same time, the respondents did not perceived any
changes in the level of transaction risks as a result of EM use with the customers.
4.3. Discussion
The two case studies analyse two different models of EM use in interorganizational relation-ships,
a collaborative model in the first case, and a transactional model in the second case.
In both models, a major outcome of EM use is transaction costs reductions, sustained
through commerce functionalities such as remote consultancy services, electronic billing as
well as collaborative functionalities such as dedicated messaging service. Such an outcome
supports the large body of TCE-based studies which argue that IT in general, EM in particular
lowers transaction costs (Malone et al., 1987; Bakos, 1991; Hart & Estrin, 1991).

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In the collaborative model, we found that EM use can increase communication and
information processing costs. The explanation relates to the trade-offs involved in collabo-rative
EM use. These trade-offs refer to the choices that the organization makes between
the different outcomes of EM functionalities on its objectives. Whilst the use of content
and collaborative functionalities such as customized discussion forums and shared data
bases adds to the level of transaction costs, they also increase customers’ switching costs
leading to lower opportunism risks. As such transaction risks are higher in collaborative
relationships (Clemons et al., 1993), the organization places more emphasis on the ability
of EM to reduce transaction risks, than the ability of EM to reduce transaction costs. Con-sequently,
the owner of the EM (in our case the supplier) assesses the different out-comes
that EM functionalities have on its objectives, and selects to use those that best
achieve its objectives.
A similar trade-off in the collaborative model relates to transaction costs and personal trust.
Commerce functionalities such as electronic billing and remote consultancy services are used
to reduce transaction costs, although they hinder personal trust. The deliberate choice to
reduce personal trust, although a significant concern for OrgA as it hampers collaboration in
the relationships suggests that personal trust plays an inferior role to organizational trust in
supporting the collaborative nature of interorganizational relationships. This support Zaheer
et al’s (1998) study which found that the influence of personal trust on the nature of a business
relationship is limited and subordinated to organizational trust.
Consequently, in collaborative relationships, the use of EM is marked by trade-offs between
different functionalities. Organizations balance their objectives, and assess the outcomes that
the content, commerce and collaborative EM functionalities have on these objectives. This bal-ancing
between the different outcomes of EM functionalities on the overall objectives of the
organizations governs the way organizations use EM applications in their collaborative
relationships.
In contrast, in the transaction models, transaction costs reduction is the primary intended
outcome of EM use. The reduction in personal trust which occurs as a result of commerce func-tionality
such as electronic billing is acknowledged as a side-effect of EM use, but is not con-sidered
as a significant outcome. As the relationships are transactional, personal trust is not a
relevant variable in the exchange (Morgan & Hunt, 1994; Lambe et al., 2001). Therefore, the
use of transactional EM does not involve trade-offs, as the primary focus is on deploying com-merce
functionalities to reduce transaction cost.
The study also finds that as suggested by Clemons et al. (1993), EM use lowers transaction
risks in the collaborative model. Collaborative functionalities such as shared databases reduce
operational risks by enabling better control over the information exchanged, whereas the ability
to customize the EM to increase the partner’s switching costs improves the bargaining position
of the organization developing the EM and thus reduces opportunism risks.
Evidence that EM support organizational goodwill trust is also found in the collaborative
model, through the use of collaborative functionalities such as shared databases, and through
the use of content functionalities such as discussion forums. The explanation of the later is that
such information sharing enables the organization to build and maintain a sense community

339
within its customer users which enhances trust in the organization that manages such com-munity,
as suggested by Luo, (2002). In line with previous studies (Hart & Saunders, 1998; Gal-livan
& Depledge, 2003), in the collaborative model, EM use was found to sustain organization
trust through increasing the amount of confidential information exchanged between parties and
through enhancing the transparency of the service.
5. CONCLUSIONS AND FUTURE RESEARCH
This article investigated the outcomes that EM use has on collaborative and transactional rela-tionships
between buyer and seller organizations by addressing the transaction cost and trust
dimensions together.
The study is based on a multi-case study research design that has a number of limitations.
First, the study includes only dyadic relationships between buyers and sellers that are analysed
only from the perspective of the organization under study. However, the objectives that orga-nizations
pursue in their interorganizational relationships and the trade-offs that govern the use
of EM in these relationships might depend on the wider internet-worked context in which orga-nizations
currently operate (Castells, 2000). Additionally, the perspective of the other party
regarding the outcomes of EM use and the trade-offs that they are prepared to accept are not
taken into account. For this reason, the study provides only a limited view on the EM use in
interorganizational relationships, and has to be extended by assessing the objectives and the
trade-offs that both partners have to make in their usage of EM. Secondly, the nature of ser-vices
transacted over the EM in the two cases is different which might affect the level of trans-action
costs. Consequently, future research is required to test the wider applicability of the
findings. Such studies should include a wider range of organizations, should address the net-work
level of EM use and, most importantly, should include all the partners involved in a par-ticular
instance of EM use.
Notwithstanding these limitations, this study bring three significant contributions to the IS
literature.
First, a thorough investigation of the role that trust together with transaction costs have for
the use of EM is lacking from the mainstream literature, although there have been claims that
these dimensions should be addressed together (Steinfield et al., 1995; Kumar et al., 1998;
Christiaanse & Kumar, 2000). Relying on two in-depth studies of collaborative and transactional
uses of EM, this study explains the outcomes of EM use on collaborative and transactional
buyer–seller relationships by addressing these dimensions together.
Second, the study found that the collaborative use of EM is shaped by the trade-offs that
organizations make between the outcomes that different EM functionalities have on their col-laborative
objectives. Organizations assesses the outcomes that different content, commerce
and collaboration EM functionalities have on their objectives relating to transaction costs and
trust, and selects to use those that allow the best way to achieve them. In contrast, such trade-offs
are not involved in transactional uses of EM, as the main focus here is to achieve trans-action
cost reductions.

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340
Finally, the study provides empirical support to the assertion that the TCE framework is lim-ited
in its ability to account for collaborative uses of EM, as suggested in previous research
(Kumar et al., 1998; Markus & Christiaanse, 2003).
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Biography
Raluca Bunduchi is a lecturer in Management at the Busi-ness
School, Aberdeen University. Prior to this, she worked
as a Research Fellow in the Research Centre for Social
Sciences at the University of Edinburgh. She studied for
her PhD in the Department of Management Science at
Strathclyde Business School in Glasgow examining the
use of internet technologies and their implications for the
nature of business relationships within and across organi-zational
boundaries. Raluca Bunduchi can be reached at
bunduchi@yahoo.com

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