© prentice hall, 2000 1 chapter 12 economics, global, and other issues in electronic commerce
TRANSCRIPT
2© Prentice Hall, 2000
Learning Objectives
Identify the major impacts of Web-based economicsDescribe the major components of Web-based
economicsAnalyze the impact of online markets on competitionDescribe the impacts and industry structure on
intermediationDescribe the role and impact of virtual communitiesEvaluate the issues involved in global electronic
commerceAnalyze the impact of EC on small businessesUnderstand the research opportunities in ECDescribe the factors that will determine the future of
EC
3© Prentice Hall, 2000
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© Prentice Hall, 2000
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© Prentice Hall, 2000
The Components ofDigital (Virtual) Economics
Digital ProductsInformation 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 toolsSymbols, 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© Prentice Hall, 2000
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
The Components ofDigital (Virtual) Economics (cont.)
7© Prentice Hall, 2000
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© Prentice Hall, 2000
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© Prentice Hall, 2000
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© Prentice Hall, 2000
Cost Curves
Quantity
Cost perunit
Optimal
Regular Products
Costperunit
Quantity
Digital Products
11© Prentice Hall, 2000
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© Prentice Hall, 2000
Quality Uncertainty and Quality Assurance
Price is becoming the major factor influencing many Web purchases
Quality is extremely important in many situationsIssue of quality is related to issue of trustQuality assurance by a trusted 3rd party is needed
For example : Trust-e and Better Business Bureau (BBB)
13© Prentice Hall, 2000
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 satisfiedproviding a guarantee, or a full refund, for dissatisfied
customers is facilitating ECreturns 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© Prentice Hall, 2000
Pricing on the Internet
Price Discovery Electronic marketplaces enable new types of price
discoveryWeb-based auctions at Onsale.com and eBay.comIntermediaries such as Priceline (www.priceline.com)Agents such as Kasbah (ecomerce.medis.mit.edu/kasbah)
The ability to customize products
The ability to price
discriminate
15© Prentice Hall, 2000
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© Prentice Hall, 2000
Contributors to Electronic Market Success
Product characteristics Digitizable products; low priced items; computers;
electronics, consumer products; and even carsIndustry 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© Prentice Hall, 2000
Impacts on Industry Structure
Seller 1
Seller 1
Seller 1Customer
Product Distribution Network
Market Information Exchange
Information
Product
Traditional Market Industry Structure
Traditional market Customers search out information (about the
products available and their prices, quality, and features) from a wide range of sources
18© Prentice Hall, 2000
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
Seller 1
Seller 1Customer
Electronic Market
Industry Structure with an Electronic Market
Information
Product
19© Prentice Hall, 2000
The Roles and Value of Brokers in Electronic Markets
Search costs for finding partners—highLack of privacy; can not remain anonymousIncomplete information; a broker can get
moreContracting risk of refusing to pay, poor
quality products, etc.Pricing inefficiencies, opportunities may be
missed
Limitations of Privately Negotiated Transactions
20© Prentice Hall, 2000
Potential 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
Winners
21© Prentice Hall, 2000
Most wholesalers, especially small onesBrokersSalespeopleNon-differentiated manufacturers
Potential Losers in EC
22© Prentice Hall, 2000
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© Prentice Hall, 2000
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.
24© Prentice Hall, 2000
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© Prentice Hall, 2000
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© Prentice Hall, 2000
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© Prentice Hall, 2000
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© Prentice Hall, 2000
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© Prentice Hall, 2000
The U.S. Policy RegardingGlobal Electronic Commerce
The private sector should leadGovernments should avoid undue restrictions on
electronic commerceWhere 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© Prentice Hall, 2000
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© Prentice Hall, 2000
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© Prentice Hall, 2000
Success Factors for Small Businesses
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
International products Information
33© Prentice Hall, 2000
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© Prentice Hall, 2000
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© Prentice Hall, 2000
Managerial Research Issues
Advertisementmeasuring the effectiveness, integration and coordination
Applicationscreating a methodology of finding EC business applications
Strategydesigning strategic advantage strategy for ECinitiating “Where to market” strategyfinding way to Integrate EC into organizations
Impactsidentify the necessary organization structure and cultureintegration with ERP and SCM
36© Prentice Hall, 2000
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© Prentice Hall, 2000
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 softwarecompanies support auctions and multiple types of certifications
EC knowledge the quantity and quality of EC knowledge is increasing rapidly