1. Economics, 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

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. Components of E-Economics
Digital Products
The Consumers
The Sellers
The Infrastructure Companies
The Intermediaries
The Support Services
Content Creators

6. Competition in E-Commerce
Impacts on competition
Lower buyers’ search cost
Speedy comparisons
Differentiation
Lower price
Customer service
Digital products lack normal wear and tear

7. Competition in E-Commerce
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

8. Competition in E-Commerce
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

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

10. 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 :
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

11. 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)

12. 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

13. 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 (
Agents such as Kasbah (ecomerce.medis.mit.edu/kasbah)
The ability to customize products
The ability to price discriminate

14. Online Vs. Offline Pricing
How to price the online vs. the offline products or services
Pacific Brokerage Services (
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

15. 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

16. 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
Seller 1
Customer
Product Distribution Network
Market Information Exchange
Information
Product
Traditional Market Industry Structure

17. 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
Customer
Electronic Market
Information
Product
Industry Structure with an Electronic Market

18. 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

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

20. 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

21. 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.

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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