THE LOGIC OF ELECTRONIC MARKETS
The concept of electronic markets is not very new. Electronic marketplaces have
been around since the 1970s. Consider the computerized airline reservation systems such
as United Airlines’ Apollo or American Airlines’ Sabre. These allowed customers to
book flights on almost every airline via travel agents around the world. Access to these
systems, however, required the special expertise of travel agent. Or, consider J.C.
Penney’s Telaction, an electronic home-shopping system that allowed customers to shop
via a cable television channel and a push-button phone (Malone, Yates, and Benjamin
1989).
Growth of the Internet
None of these electronic marketplaces, however, created an air of excitement
comparable to that created by Internet-based markets. The tremendous growth of the
Internet has led millions of companies to set up shop on the Internet and over 100 million
consumers worldwide are eagerly participating in the global online marketplace. The
arrival of easy-to-use Web browsers transformed the Internet from a specialized, textoriented
medium to the multimedia, massive, and global cyberspace. Internet traffic is
approximately doubling each year, which represents extremely fast growth, much faster
that increases in other communication services (Goffman and Odlyzko, 2000). By
December 1997, about 1.5 million domain names had been registered (Friel 1997). By
early 1999, the registered domain names numbered 5.3 million and by February 2000,
there were about 11 million sites (Tschong, 2000). By mid-2001, the number of Internet
sites exceeded 100 million (http://www.isc.org/) and Internet users globally were almost
500 million (. Easy, inexpensive wireless access could push the number of global users
beyond 1 billion in just a few years. The number using the Web in English had fallen
below 50% by 2000 and would reduce to fewer than 30% by 2003.
Electronic Marketplaces: Various Roles
Internet has created a new electronic marketspace that no longer requires firms to
invest huge amounts in the development and maintenance of task-specific trading
systems. This makes it compelling for companies, small and large, to take advantage of
the benefits of this new medium. Electronic marketplaces eliminate much of the paper
handling and clerical work, decreasing the high costs of creating, processing, distributing,
storing, and retrieving paper-based information. This reduces processing time and allows
increased automation, thereby lowering overhead and inventory. Consequently, it
permits just-in-time production and payments. Furthermore, companies of every size can
now participate in a truly global market and reach customers in remote locations [Adam,
1997 #9; Dholakia, 1998 #1634]. Electronic marketplaces constitute not just a medium
for marketing communication but also offer a means of distribution, especially for digital
product categories (Hoffman and Novak 1995a). Software companies such as Network
Barriers to Electronic Marketplaces
Despite the rapid growth of the Internet, some problems associated with electronic
marketplaces remain. These need to be addressed before electronic markets will find
general, mass acceptance. While the World Wide Web is far friendlier than the older
interfaces, about 50% of the people report difficulties in using computer-based
technologies (Katz and Aspden, 1997). Many Internet users still perceive the risk
associated with sending a credit card number over the Internet or using any other form of
electronic payment as too high. As with any new direct marketing channel, the risk
associated with product delivery and return still acts as another constraint to a wider use
of electronic marketplaces for commercial activities (Dholakia, 1995). In addition,
research shows that online shopping is perceived to be relatively convenient and efficient
but not yet very fun to use [Clemons, 2000 #2327; Wikström, forthcoming 2001 #2166].
Compared to store, catalog, or TV shopping it is also viewed as a somewhat intimidating
way to shop. Such negative hedonic perceptions appear to be another significant barrier
to the greater use of shopping in electronic marketplaces (Dholakia and Pedersen 1994).
Moreover, shopping is still a predominantly female activity [Dholakia, 1987 #1264] and
in most countries, men dominate the online demographics. The US is to date the only
country where women have surpassed men online. In Europe, some countries such as
Sweden and Finland also have a high female Internet participation. In most European
countries – such as Germany where women account for only 35% of the entire online
population (Rickert and Sacharow, 2000) – electronic marketplaces might not be able to
reach a critical mass of customers as long as there is a heavy male bias. Moreover,
electronic marketplaces still lack many of the useful services encountered in physical
marketplaces (such as easy return, layaway, alterations) and cannot provide the kind of
socialization people are often looking for when they are going to a mall. According to
Jarvenpaa and Todd (1997), although shoppers were impressed with the number and
variety of online retailers, in most product categories they were disappointed with the
depth of product lines being offered. Even though not all of these shortcomings of
electronic marketplaces can be overcome at the moment, it is expected that new methods
to effectively deal with these constraints will evolve quickly and lead to an increased
acceptance of electronic marketplaces. Connection speed will be one of the chief
challenges as consumers are unwilling to accept long waiting times for sites to load. In
some countries high-speed Internet access has become broadly available but the majority
of the global online population will be using slow modems for years to come. As a result
we see a curious digital divide within online markets where companies that launch
websites of ever-increasing complexity will poorly serve consumers with slow
connection speed.
The concept of electronic markets is not very new. Electronic marketplaces have
been around since the 1970s. Consider the computerized airline reservation systems such
as United Airlines’ Apollo or American Airlines’ Sabre. These allowed customers to
book flights on almost every airline via travel agents around the world. Access to these
systems, however, required the special expertise of travel agent. Or, consider J.C.
Penney’s Telaction, an electronic home-shopping system that allowed customers to shop
via a cable television channel and a push-button phone (Malone, Yates, and Benjamin
1989).
Growth of the Internet
None of these electronic marketplaces, however, created an air of excitement
comparable to that created by Internet-based markets. The tremendous growth of the
Internet has led millions of companies to set up shop on the Internet and over 100 million
consumers worldwide are eagerly participating in the global online marketplace. The
arrival of easy-to-use Web browsers transformed the Internet from a specialized, textoriented
medium to the multimedia, massive, and global cyberspace. Internet traffic is
approximately doubling each year, which represents extremely fast growth, much faster
that increases in other communication services (Goffman and Odlyzko, 2000). By
December 1997, about 1.5 million domain names had been registered (Friel 1997). By
early 1999, the registered domain names numbered 5.3 million and by February 2000,
there were about 11 million sites (Tschong, 2000). By mid-2001, the number of Internet
sites exceeded 100 million (http://www.isc.org/) and Internet users globally were almost
500 million (. Easy, inexpensive wireless access could push the number of global users
beyond 1 billion in just a few years. The number using the Web in English had fallen
below 50% by 2000 and would reduce to fewer than 30% by 2003.
Electronic Marketplaces: Various Roles
Internet has created a new electronic marketspace that no longer requires firms to
invest huge amounts in the development and maintenance of task-specific trading
systems. This makes it compelling for companies, small and large, to take advantage of
the benefits of this new medium. Electronic marketplaces eliminate much of the paper
handling and clerical work, decreasing the high costs of creating, processing, distributing,
storing, and retrieving paper-based information. This reduces processing time and allows
increased automation, thereby lowering overhead and inventory. Consequently, it
permits just-in-time production and payments. Furthermore, companies of every size can
now participate in a truly global market and reach customers in remote locations [Adam,
1997 #9; Dholakia, 1998 #1634]. Electronic marketplaces constitute not just a medium
for marketing communication but also offer a means of distribution, especially for digital
product categories (Hoffman and Novak 1995a). Software companies such as Network
Barriers to Electronic Marketplaces
Despite the rapid growth of the Internet, some problems associated with electronic
marketplaces remain. These need to be addressed before electronic markets will find
general, mass acceptance. While the World Wide Web is far friendlier than the older
interfaces, about 50% of the people report difficulties in using computer-based
technologies (Katz and Aspden, 1997). Many Internet users still perceive the risk
associated with sending a credit card number over the Internet or using any other form of
electronic payment as too high. As with any new direct marketing channel, the risk
associated with product delivery and return still acts as another constraint to a wider use
of electronic marketplaces for commercial activities (Dholakia, 1995). In addition,
research shows that online shopping is perceived to be relatively convenient and efficient
but not yet very fun to use [Clemons, 2000 #2327; Wikström, forthcoming 2001 #2166].
Compared to store, catalog, or TV shopping it is also viewed as a somewhat intimidating
way to shop. Such negative hedonic perceptions appear to be another significant barrier
to the greater use of shopping in electronic marketplaces (Dholakia and Pedersen 1994).
Moreover, shopping is still a predominantly female activity [Dholakia, 1987 #1264] and
in most countries, men dominate the online demographics. The US is to date the only
country where women have surpassed men online. In Europe, some countries such as
Sweden and Finland also have a high female Internet participation. In most European
countries – such as Germany where women account for only 35% of the entire online
population (Rickert and Sacharow, 2000) – electronic marketplaces might not be able to
reach a critical mass of customers as long as there is a heavy male bias. Moreover,
electronic marketplaces still lack many of the useful services encountered in physical
marketplaces (such as easy return, layaway, alterations) and cannot provide the kind of
socialization people are often looking for when they are going to a mall. According to
Jarvenpaa and Todd (1997), although shoppers were impressed with the number and
variety of online retailers, in most product categories they were disappointed with the
depth of product lines being offered. Even though not all of these shortcomings of
electronic marketplaces can be overcome at the moment, it is expected that new methods
to effectively deal with these constraints will evolve quickly and lead to an increased
acceptance of electronic marketplaces. Connection speed will be one of the chief
challenges as consumers are unwilling to accept long waiting times for sites to load. In
some countries high-speed Internet access has become broadly available but the majority
of the global online population will be using slow modems for years to come. As a result
we see a curious digital divide within online markets where companies that launch
websites of ever-increasing complexity will poorly serve consumers with slow
connection speed.
Associates and Adobe use the Internet to offer their products in directly downloadable
form. They encourage people to download and test their software on a free, trial basis
and subsequently collect site license fees from corporations that decide to use it
continuously (Cronin 1994). In short, in electronic marketplaces companies can reduce
the marginal cost of interorganizational coordination and handle larger volumes of
market transactions (Bakos 1991).
Electronic marketplaces provide consumers with a plethora of information and
choices, but they also create the risk of information overload (Pitcher, 1999). When
consumers are inundated with information they soon get frustrated because they can no
longer make a rational decision within the time they have. Here easy search mechanisms
are helpful. Directories and searching tools on Web portals such as Yahoo, Google,
Lycos, Excite, and Snap make it particularly easy to locate a company or find information
on a certain product or service. Specialized search sites exist for categories such as
automobiles (e.g., Auto-by-tel) and travel services (Travelocity.com, PreviewTravel.com,
Expedia, TheTrip.com). Yet, the problem of selecting among many different offerings
often remains. One solution to this problem was BargainFinder, the “mother of all
Shopbots”, developed by Andersen Consulting (Jasco 1998). Shopbots are shopping
robots or agents that take a user’s query, visit the shops that may have the desired
products, bring back the results, and present them in a consolidated and compact format,
adding value for the consumer by reducing search costs [Bakos, 1997 #2161]. Other
shopbots followed: Pricewatch for computer hardware, Priceline.com for airfares, Bottom
Dollar for general merchandise categories (Jasco, 1998). By decreasing the time and cost
of obtaining information and enabling customers to find the products that best match their
needs, such sites have begun to tackle the problem of information overload [Hoque, 1999
#1631].
Electronic marketplaces can facilitate online product trials. The DEC division of
Compaq, for instance, allowed customers on the World Wide Web to “test drive” its
Alpha AXP computer. Such simulated trials lead to reduced uncertainty in the decisionmaking
process and ultimately stimulate purchase (Hoffman and Novak, 1995a).
All these benefits of electronic marketplaces translate either directly or indirectly
into savings for the customer and increased efficiency for the business. Therefore, some
authors argue that the development of electronic marketplaces is inevitable and
ultimately, many, if not most, transactions will be conducted electronically (Malone,
Yates, and Benjamin 1989). One leading industry observer, for example, projected that
by 2003, half of the U.S. firms will conduct over 80 percent of their transactions by
electronic means (Fernandez 1999). The economic and social impact of such a massive
transformation is self-evident
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