E-commerce: Economic and Social Aspects

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E-commerce: Economic and Social Aspects

E-commerce is technology-enabled buying and selling that occurs over telecommunications networks such as the Internet. As in physical marketplaces, these exchanges can occur between businesses, between a business and a consumer, or even between consumers. E-commerce has grown dramatically since the late 1990s. This transition from traditional physical marketplaces to technology-enabled ones has important economic and social implications.

One significant economic effect is the reduction of transaction costs compared to traditional commerce. In the 1930s economist Ronald Coase defined transaction costs as the costs associated with organizing a transaction, starting with searching for a product, then negotiating for a price, and finally making the exchange. E-commerce reduces transaction costs by removing many of the geographic and time barriers that buyers and sellers previously faced. Customers who had to drive to a physical store location during business hours, park, and manually do comparison shopping before buying, can now do this for many products online, anytime, with the help of comparison shopping sites such as MySimon. For information products, such as digital music, which can be both bought and delivered online, e-commerce also reduces the product delivery cost.

For businesses, the potential cost savings are even greater. Most industries are organized into supply chains that integrate supply and demand requirements across manufacturers, suppliers, warehouses, and stores so that merchandise shows up on time and at the right location. Business rules provide the glue that binds the various producers together by specifying company policies on pricing, payment, returns, and other contractual information. By automating business rules using technologies such as XML , e-commerce platforms provide fast, synchronized exchange of supply and demand information between supply chain members thereby reducing both labor and inventory costs, as well as increasing customer satisfaction. Joint work between and within companies is also fostered by Internet-based technologies that allow easy communication across different time zones and collaboration using communal web sites.

Privacy

Internet technologies also have an effect on social issues, such as privacy. Physical and technological barriers to gathering personal information about consumers are rapidly disappearing. While companies have always gathered and resold information about their customers' purchasing habits, the Internet simplifies this process and allows new types of information to be collected. DoubleClick, a market research firm, compiles information not only about customer purchasing habits but also about their web browsing behavior across multiple stores and information sites.

Privacy issues exist concerning who owns and controls the use of this information and how it may be gathered. During 2001, the U.S. Congress reviewed at least fifty privacy-related bills, many of which had to do with whether consumers must opt in or opt out of such information gathering. In the private sector, major companies such as the IBM Corporation endorse using clearly posted privacy policies on web sites that detail where and how personal information can be used.

On the positive side, companies generally collect customer information to provide more personalized service and to speed up online transactions. Amazon.com's recommendation services combine information about a customer's past purchases with those of other customers with similar interests. Companies such as Soundscan and Bookscan gather previously unavailable music and book sales transaction data. Since these data detail not only how much merchandise was sold, but also where and to which demographic groups, marketing campaigns can use these data to target their focus and promote products to niche markets.

Security

While privacy addresses the customers' control over the confidentiality of their transaction information, security considers how such transactions can be protected from assault or corruption. Customers must be confident that credit card numbers will remain secure before providing them on the Internet. While credit card theft and other types of financial fraud have always been possible, the potential for thieves to use the Internet to steal credit card numbers on a wholesale basis has been a big concern. To reduce this possibility, companies use digital certificates to authenticate that they are who they claim to be, and not some fraudulent site stealing customer credit card numbers. Certificate authorities, such as VeriSign, act as trusted third parties to issue digital certificates to companies. Using industry-standard Secure Sockets Layer (SSL) technology, digital certificates employ encryption-based protocols to protect the integrity of customer data exchanged online. Once the transaction data resides on the merchant site, firewalls can be used to restrict Internet access.

Finding the Niche

E-commerce businesses may be completely online enterprises, such as Travelocity which sells airline tickets and other travel services, or they may comprise a mixture of online and traditional business, wherein the Internet adds another channel for reaching the consumer. In the early days of the Internet economy, many so-called "dot.com" startups commanded astronomical stock prices without posting real profits. For a brief period, investors were willing to support e-commerce ventures without the usual need to be convinced of the soundness of a particular business plan. Vast amounts of money were poured into the rapid creation of web-based businesses and services.

One of the more spectacular dot.com failures was WebVan, the biggest online grocer, which went through $1.2 billion of funding during 18 months of business before closing in July 2001. Much of WebVan's money went into building a new distribution infrastructure . According to industry analysts, the company tried to grow too rapidly, outpacing consumer interest in the service it wanted to provide. The company's assumption was that large numbers of customers, dissatisfied with certain aspects of in-store shopping, would change their buying habits and switch to purchasing groceries through an online service. The kind of market surveys and analysis usually required by investors before they fund a new enterprise was overlooked during the rush to fund Internet-based companies such as WebVan that offered an appealing idea.

By contrast, traditional grocers, avoiding a purely Internet-based strategy, have more slowly entered the realm of e-commerce by combining traditional grocery stores and distribution methods with Internet order-taking capabilities. Other traditional retailers that rely on a solid existing distribution infrastructure, such as Land's End, have capitalized on the Internet's new sales channels while minimizing new distribution costs.

Although the business-to-consumer sector was hardest hit by the Internet-bust, business-to-business trading hubs also faced a high failure rate. One well-known example was the Chemdex marketplace for the chemicals industry. Such independent marketplaces generally start out lacking brand name and existing supplier-buyer relationships, both of which cost time and money to acquire, and often end up running out of money (and the ability to raise more money) before they can turn a profit.

However, some traditional businesses do face rigorous e-commerce competition, and some fully web-based businesses have become profitable, creating new market categories in the process. In the travel industry, travel agents serve as intermediaries between the airlines and customers. As more online services such as Travelocity and Orbitz are available to connect customers with the products and services they want, the Internet often effectively disintermediates travel agents, creating new competition. The fully web-based online auction site eBay, which effectively launched the online auction market, is an example of a successful "dot.com" enterprise.

Finding the right mixture of on-and-offline commerce is always a challenge. As is the case in traditional business ventures, the experience gained by the successes and failures of one generation of entrepreneurs can serve as case studies for the e-commerce leaders of the future.

see also E-commerce; Internet: Applications; Privacy; Security; World Wide Web.

Tracy Mullen

Bibliography

Brown, Keith. The Interactive Marketplace: Business-to-Business Strategies for Delivering Just-in-Time, Mass-Customized Products. New York: McGraw-Hill Professional Publishing, 2001.

Camp, L. Jean. Trust and Risk in Internet Commerce. Cambridge, MA: MIT Press, 2000.

Tedeschi, Bob. "Divining the Nature of Business." New York Times, October 2, 2000.