ELECTRONIC COMMERCE: DEFINITIONS AND TYPOLOGY
So what exactly does electronic commerce in electronic marketplaces mean? It
includes the notion of paperless exchanges of business information using EDI (electronic
data interchange), electronic mail (E-mail), electronic bulletin boards, electronic funds
transfer (EFT), and other similar technologies (Strader and Shaw, 1997). Electronic data
interchange is often seen as the foundation cornerstone of electronic commerce. “EDI is
a common industry standard for preparing, processing and communicating business
transactions electronically with other companies, regardless of their different computing
platforms” (Anon., 1995a). Although electronic commerce can be conducted over many
different systems – cable shopping networks, the French Minitel system, various
Videotex systems, or online services such as the America Online – none of these
mechanisms has the far reaching scope and potential for transforming the marketing
function as the generic, Web-based Internet (Hoffman and Novak 1996; [Weiber, 1998
#2271]).
Definitions of electronic commerce have been around for while and have evolved
over time, resulting in ever more sophisticated characterizations [Greenstein, 2000
#2297]. One of the early definitions for electronic markets was given by Malone, Yates,
and Benjamin (1989, p. ES24) who referred to it as “networks that let customers compare
and order offerings from competing suppliers.” Later, Bakos (1991, p. 296) introduced
the terms “electronic marketplace” and “electronic market system” which he defined as
“an interorganizational information system that allows the participating buyers and sellers
to exchange information about prices and product offerings”. These definitions were still
somewhat vague but Rayport and Sviokla (1995, p. 75) rendered a much more
comprehensive definition of what they called “marketspace”. They saw marketspace as
“a virtual realm where products and services exist as digital information and can be
delivered through information-based channels.” This definition reflected to a greater
degree the rapid development of the Internet, the new global medium that no longer
limited the environment of electronic commerce to organizations as Bakos’s definition
did. Even more precise were Hoffman and Novak (1996) who introduced the term
hypermedia computer-mediated environments (CME) which they defined as “a dynamic
distributed network, potentially global in scope ... which allows consumers and firms to
1) provide and interactively access hypermedia content (i.e. ‘machine interaction’), and
2) communicate through the medium (i.e. ‘person interaction’).” While this definition is
clearly restricted to hypermedia environments of which the World Wide Web is certainly
the most popular at the moment, all the other terms encompass a wider spectrum of
platforms for electronic commerce. For the remainder of this paper the term electronic
marketplace is used for networks that allow the exchange of digital information for the
purpose of conducting business. This includes global networks such as the Internet as
well as local, proprietary networks.
ECONOMIC CHARACTERISTICS OF ELECTRONIC MARKETS
To grasp the implications of electronic marketplaces on businesses one must first
understand their economic characteristics [Smith, 2000 #2299]. As consumers obtain
easier access to more information about price and product offerings of alternative
suppliers, their search costs of obtaining the information decrease. By the same token
suppliers’ costs of providing information about price and product characteristics to
additional customers also decline. These benefits obviously increase with the number of
participants joining the electronic marketplace as long as effective and efficient search
mechanisms are in place to deal with the vast amount of information available.
Consequently, the average price businesses charge in electronic marketplaces for certain
products -- especially commodities -- decreases, as the proportion of customers with low
search costs increases (Bakos, 1991). This clearly empowers buyers who are able to get a
better mix of benefit-price bundles (Sarkar, Butler, and Steinfield, 1995).
Decreasing search costs also lead to lower profit margins for sellers of
commodities as businesses can no longer command a price premium (Bakos, 1991;
[Rayport, 1995 #1937]). In addition, switching costs in electronic marketplaces approach
zero, as participation in electronic marketplaces no longer requires large investments of
money, time, or skill. This reduces even further the market power of sellers.
Sellers in electronic marketplaces also have the opportunity to substantially
reduce their coordination and transaction costs. Although these might not always offset
the smaller profit margins, companies may enjoy the benefits of increased volume
(Benjamin and Wigand 1995). In addition, electronic marketplaces redefine economies
of scale and scope. Even small companies can now provide additional product or service
offerings at low incremental costs, particularly when the nature of the product or service
is information-based like software, financial services, music, games, and video. This
makes small players more competitive even in markets dominated by big companies.
Once a product or service is offered in the electronic marketplace it does not matter
whether a single person or millions of users request it, provided the server is powerful
and scalable.
These new economies of scale make it possible to add new, customized services.
FedEx, UPS, DHL and others allow individuals to track packages through their websites.
For FedEx – the initiator of such online tracking – this brings a FedEx office to every
desktop computer. Or consider the United Services Automobile Association (USAA), an
insurance company, which makes use of the new economies of scale. USAA found that
it could also use its customer information to create new value for its customers by serving
a broader set of their needs. The company now offers, for instance, financing packages
and shopping services for almost every kind of product in addition to its core business.
Cross-selling results in a loyal customer base and new profitable business ventures
(Rayport and Sviokla 1995). In the stock trading arena, Schwab and E-Trade started as
providers of discount stock-brokering services but these firms have been augmenting
their web offerings gradually and are now beginning to look like full-service financial
firms.
IMPLICATIONS FOR BUSINESSES
The Race to CommoditizationThe economic efficiencies of electronic marketplaces can constitute potential
opportunities as well as potential threats for businesses. If a company cannot
differentiate its products or services on any other basis but price it is likely to face fierce
competition from firms participating in the electronic marketplace. As more and more
goods and services are transformed so that they can be offered or even transmitted
electronically, the number of companies involved in this new field of competition will
increase dramatically. Eventually electronic marketplaces are likely to become a
strategic necessity and part of almost every industry’s infrastructure (Bakos 1991,
Fernandez 1999).
But as many e-commerce retailers head toward commodity pricing, it becomes
important for businesses to understand the market they are in. Only a few retail segments
will be profitable. The biggest differentiator among product categories on the Web is the
ability to judge the quality of the product [de Figueiredo, 2000 #2318]. Books, CDs and
air travel are quasi-commodity products whose quality is easy to judge. Produce, art,
high-end clothing and homes are “experience” products with variable quality – the “look
and feel” of the product is important in making a purchase decision. The difference
between commodity and look-and-feel experience goods, however, does not only lie in
the intensity of the consumer experience. As de Figueiredo (p. 44) points out, “a number
of other aspects of the buying process change, such as how much more information the
seller has about the product than the buyer, the need of the consumer to engage in a
search for optimal goods, and the degree to which seller reputation is important.” While it
is easy for businesses to enter the online commodity and quasi-commodity segments,
profitability will be very hard to achieve there. The challenge to sell look-and-feel
products with variable quality on the Internet is big but the potential rewards for those
who succeed are large. Those and other aspects need to be considered by businesses
trying to operate profitably in electronic markets.
Markets for Digital Assets
Companies competing with firms in the electronic marketplace have to appreciate
the “law of digital assets.” Digital assets – text, graphics, audio, or video stored as digital
information – are not used up in their consumption and allow a potentially infinite
number of transactions with variable costs close to zero. One example of a company
making use of digital assets is Image Technology Corporation, a company that captures,
organizes, selects, manipulates, and distributes photographic images digitally. Image
Technology can create a repeat customer’s order far more quickly at a fraction of the
costs incurred by companies using traditional techniques. Having created a database of
images the company can take advantage of tremendous economies of scale and scope and
price aggressively while still making good margins. Needless to say that rival companies
without digital assets have a tough time competing with Image Technology (Rayport and
Sviokla 1995). Another example is BriefServe.com (http://www.briefserve.com/), a first-tomarket
database and document retrieval service. This company provides immediate
access to a comprehensive collection of briefs and appendices for all current California
State Supreme Courts of Appeal decisions, United States Court of Appeals decisions
from 1981 to the present and to rulings by the U.S. Supreme Court from 1984 to the
present. Lawyers and other members of the legal community coming to the law.com
website can access BriefServe.com from law.com’s Supreme Court Monitor page and
through the Court Watch areas of the New York, California, and Pennsylvania State sites
[Anon., 2001 #2380]. There is basically no limit to the scalability of this business.
Digital assets, however, have a major disadvantage. They are very easy to copy
and re-transmit. This raises serious questions of intellectual property rights and
commercial protection of these properties, especially in countries where the laws of the
firm’s home country cannot enforced readily. Innovative solutions to such problems are
being sought worldwide. Examples of this include digital watermarks developed by
Fraunhofer IHG, a German research institution, to indelibly inscribe digital documents
with an electronic mark. More recent developments in steganography, caused by attacks on earlier forms of watermark technology, are techniques such as gradual masking and
fingerprinting, where the copyrighted information is hidden more deeply and in
increasingly complex ways within the document [Johnson, 1998 #2381; Johnson, 1999
#2382].
So what exactly does electronic commerce in electronic marketplaces mean? It
includes the notion of paperless exchanges of business information using EDI (electronic
data interchange), electronic mail (E-mail), electronic bulletin boards, electronic funds
transfer (EFT), and other similar technologies (Strader and Shaw, 1997). Electronic data
interchange is often seen as the foundation cornerstone of electronic commerce. “EDI is
a common industry standard for preparing, processing and communicating business
transactions electronically with other companies, regardless of their different computing
platforms” (Anon., 1995a). Although electronic commerce can be conducted over many
different systems – cable shopping networks, the French Minitel system, various
Videotex systems, or online services such as the America Online – none of these
mechanisms has the far reaching scope and potential for transforming the marketing
function as the generic, Web-based Internet (Hoffman and Novak 1996; [Weiber, 1998
#2271]).
Definitions of electronic commerce have been around for while and have evolved
over time, resulting in ever more sophisticated characterizations [Greenstein, 2000
#2297]. One of the early definitions for electronic markets was given by Malone, Yates,
and Benjamin (1989, p. ES24) who referred to it as “networks that let customers compare
and order offerings from competing suppliers.” Later, Bakos (1991, p. 296) introduced
the terms “electronic marketplace” and “electronic market system” which he defined as
“an interorganizational information system that allows the participating buyers and sellers
to exchange information about prices and product offerings”. These definitions were still
somewhat vague but Rayport and Sviokla (1995, p. 75) rendered a much more
comprehensive definition of what they called “marketspace”. They saw marketspace as
“a virtual realm where products and services exist as digital information and can be
delivered through information-based channels.” This definition reflected to a greater
degree the rapid development of the Internet, the new global medium that no longer
limited the environment of electronic commerce to organizations as Bakos’s definition
did. Even more precise were Hoffman and Novak (1996) who introduced the term
hypermedia computer-mediated environments (CME) which they defined as “a dynamic
distributed network, potentially global in scope ... which allows consumers and firms to
1) provide and interactively access hypermedia content (i.e. ‘machine interaction’), and
2) communicate through the medium (i.e. ‘person interaction’).” While this definition is
clearly restricted to hypermedia environments of which the World Wide Web is certainly
the most popular at the moment, all the other terms encompass a wider spectrum of
platforms for electronic commerce. For the remainder of this paper the term electronic
marketplace is used for networks that allow the exchange of digital information for the
purpose of conducting business. This includes global networks such as the Internet as
well as local, proprietary networks.
ECONOMIC CHARACTERISTICS OF ELECTRONIC MARKETS
To grasp the implications of electronic marketplaces on businesses one must first
understand their economic characteristics [Smith, 2000 #2299]. As consumers obtain
easier access to more information about price and product offerings of alternative
suppliers, their search costs of obtaining the information decrease. By the same token
suppliers’ costs of providing information about price and product characteristics to
additional customers also decline. These benefits obviously increase with the number of
participants joining the electronic marketplace as long as effective and efficient search
mechanisms are in place to deal with the vast amount of information available.
Consequently, the average price businesses charge in electronic marketplaces for certain
products -- especially commodities -- decreases, as the proportion of customers with low
search costs increases (Bakos, 1991). This clearly empowers buyers who are able to get a
better mix of benefit-price bundles (Sarkar, Butler, and Steinfield, 1995).
Decreasing search costs also lead to lower profit margins for sellers of
commodities as businesses can no longer command a price premium (Bakos, 1991;
[Rayport, 1995 #1937]). In addition, switching costs in electronic marketplaces approach
zero, as participation in electronic marketplaces no longer requires large investments of
money, time, or skill. This reduces even further the market power of sellers.
Sellers in electronic marketplaces also have the opportunity to substantially
reduce their coordination and transaction costs. Although these might not always offset
the smaller profit margins, companies may enjoy the benefits of increased volume
(Benjamin and Wigand 1995). In addition, electronic marketplaces redefine economies
of scale and scope. Even small companies can now provide additional product or service
offerings at low incremental costs, particularly when the nature of the product or service
is information-based like software, financial services, music, games, and video. This
makes small players more competitive even in markets dominated by big companies.
Once a product or service is offered in the electronic marketplace it does not matter
whether a single person or millions of users request it, provided the server is powerful
and scalable.
These new economies of scale make it possible to add new, customized services.
FedEx, UPS, DHL and others allow individuals to track packages through their websites.
For FedEx – the initiator of such online tracking – this brings a FedEx office to every
desktop computer. Or consider the United Services Automobile Association (USAA), an
insurance company, which makes use of the new economies of scale. USAA found that
it could also use its customer information to create new value for its customers by serving
a broader set of their needs. The company now offers, for instance, financing packages
and shopping services for almost every kind of product in addition to its core business.
Cross-selling results in a loyal customer base and new profitable business ventures
(Rayport and Sviokla 1995). In the stock trading arena, Schwab and E-Trade started as
providers of discount stock-brokering services but these firms have been augmenting
their web offerings gradually and are now beginning to look like full-service financial
firms.
IMPLICATIONS FOR BUSINESSES
The Race to CommoditizationThe economic efficiencies of electronic marketplaces can constitute potential
opportunities as well as potential threats for businesses. If a company cannot
differentiate its products or services on any other basis but price it is likely to face fierce
competition from firms participating in the electronic marketplace. As more and more
goods and services are transformed so that they can be offered or even transmitted
electronically, the number of companies involved in this new field of competition will
increase dramatically. Eventually electronic marketplaces are likely to become a
strategic necessity and part of almost every industry’s infrastructure (Bakos 1991,
Fernandez 1999).
But as many e-commerce retailers head toward commodity pricing, it becomes
important for businesses to understand the market they are in. Only a few retail segments
will be profitable. The biggest differentiator among product categories on the Web is the
ability to judge the quality of the product [de Figueiredo, 2000 #2318]. Books, CDs and
air travel are quasi-commodity products whose quality is easy to judge. Produce, art,
high-end clothing and homes are “experience” products with variable quality – the “look
and feel” of the product is important in making a purchase decision. The difference
between commodity and look-and-feel experience goods, however, does not only lie in
the intensity of the consumer experience. As de Figueiredo (p. 44) points out, “a number
of other aspects of the buying process change, such as how much more information the
seller has about the product than the buyer, the need of the consumer to engage in a
search for optimal goods, and the degree to which seller reputation is important.” While it
is easy for businesses to enter the online commodity and quasi-commodity segments,
profitability will be very hard to achieve there. The challenge to sell look-and-feel
products with variable quality on the Internet is big but the potential rewards for those
who succeed are large. Those and other aspects need to be considered by businesses
trying to operate profitably in electronic markets.
Markets for Digital Assets
Companies competing with firms in the electronic marketplace have to appreciate
the “law of digital assets.” Digital assets – text, graphics, audio, or video stored as digital
information – are not used up in their consumption and allow a potentially infinite
number of transactions with variable costs close to zero. One example of a company
making use of digital assets is Image Technology Corporation, a company that captures,
organizes, selects, manipulates, and distributes photographic images digitally. Image
Technology can create a repeat customer’s order far more quickly at a fraction of the
costs incurred by companies using traditional techniques. Having created a database of
images the company can take advantage of tremendous economies of scale and scope and
price aggressively while still making good margins. Needless to say that rival companies
without digital assets have a tough time competing with Image Technology (Rayport and
Sviokla 1995). Another example is BriefServe.com (http://www.briefserve.com/), a first-tomarket
database and document retrieval service. This company provides immediate
access to a comprehensive collection of briefs and appendices for all current California
State Supreme Courts of Appeal decisions, United States Court of Appeals decisions
from 1981 to the present and to rulings by the U.S. Supreme Court from 1984 to the
present. Lawyers and other members of the legal community coming to the law.com
website can access BriefServe.com from law.com’s Supreme Court Monitor page and
through the Court Watch areas of the New York, California, and Pennsylvania State sites
[Anon., 2001 #2380]. There is basically no limit to the scalability of this business.
Digital assets, however, have a major disadvantage. They are very easy to copy
and re-transmit. This raises serious questions of intellectual property rights and
commercial protection of these properties, especially in countries where the laws of the
firm’s home country cannot enforced readily. Innovative solutions to such problems are
being sought worldwide. Examples of this include digital watermarks developed by
Fraunhofer IHG, a German research institution, to indelibly inscribe digital documents
with an electronic mark. More recent developments in steganography, caused by attacks on earlier forms of watermark technology, are techniques such as gradual masking and
fingerprinting, where the copyrighted information is hidden more deeply and in
increasingly complex ways within the document [Johnson, 1998 #2381; Johnson, 1999
#2382].
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