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

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

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

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

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

5. The Components ofDigital (Virtual) Economics • Digital Products Information and entertainment products that are digitized : • Paper-based documents : books, newspapers, magazines journals, newsletters • Product information : product specifications, catalogs, user manuals • Graphics : photographs, postcards, calendars, maps, posters, x-rays • Audio : music recordings, speeches, lectures, industrial voices • Software : programs, games, development tools Symbols, tokens and concepts : • Tickets and reservations : airlines, hotels, concerts, sport events, transportation • Financial instruments : checks, electronic currencies, credit cards, securities Processes and services : • Government services : forms, benefits, and welfare payments, licenses • Electronic messaging : letters, faxes, telephone calls • Business value creation processes : ordering, bookkeeping, inventorying • Auction, bidding, bartering • Remote education, telemedicine, and other interactive services • Cybercafes interactive entertainment, virtual communities

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

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

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

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

10. Cost Curves Cost per unit Cost per unit Optimal Quantity Quantity Regular Products Digital Products

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 you are trying to reach

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)

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

14. The ability to customize products The ability to price discriminate 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)

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

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

17. Market Information Exchange Seller 1 Seller 1 Customer Seller 1 Product Distribution Network Information Product Impacts on Industry Structure • Traditional market • Customers search out information (about the products available and their prices, quality, and features) from a wide range of sources Traditional Market Industry Structure

18. Seller 1 Electronic Market Seller 1 Customer Seller 1 Product Distribution Network Information Product Impacts on Industry Structure (cont.) • Electronic markets • The search cost for consumers is reduced • Consumers can buy products for lower prices, intermediaries play new roles Industry Structure with an Electronic Market

19. The Roles and Value of Brokers in Electronic Markets Limitations of PrivatelyNegotiatedTransactions • 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. • Pricinginefficiencies, opportunities may be missed

20. Potential Winners and Losers in EC • Winners • Proprietary network owners • Midsize manufacturers • Technology suppliers • Market makers • Online dedicated companies • Conventional retailers that use online extensively • Providers of diversified Internet services • Advertisement and target marketing companies • Security, special infrastructure, and payment systems providers • Internet access providers • Portal providers • A few large resellers • EC software companies

21. Potential Losers in EC • Most wholesalers, especially small ones • Brokers • Salespeople • Non-differentiated manufacturers

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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