Friday, 28 June 2019

WHY STUDY E-COMMERCE?

WHY STUDY E-COMMERCE?

WHY STUDY E-COMMERCE?


Why are there college courses and textbooks on e-commerce when there are no courses or textbooks on “TV Commerce,” “Radio Commerce,” “Railroad Commerce,” or “Highway Commerce,” even though these technologies had profound impacts on commerce in the twentieth century and account for far more commerce than e-commerce? The reason for the interest specifically in e-commerce is that e-commerce technology (discussed in detail in Article 2 and 3) is different and more powerful than any of the other technologies we have seen in the past century. E-commerce technologies—and the digital markets that result—have brought about some fundamental, unprecedented shifts in commerce. While these other technologies transformed economic life in the twentieth century, the evolving Internet and other information technologies are shaping the twenty-first century.

Prior to the development of e-commerce, the marketing and sale of goods was a mass-marketing and sales force–driven process. Marketers viewed consumers as passive targets of advertising campaigns and branding “blitzes” intended to influence their long- term product perceptions and immediate purchasing behavior. Companies sold their products via well-insulated channels. Consumers were trapped by geographical and social boundaries, unable to search widely for the best price and quality. Information about prices, costs, and fees could be hidden from the consumer, creating profitable information asymmetries for the selling firm. Information asymmetry refers to any disparity in relevant market information among parties in a transaction. It was so expensive to change national or regional prices in traditional retailing (what are called menu costs) that one national price was the norm, and dynamic pricing to the marketplace let alone to individuals in the marketplace—changing prices in real time—was unheard of. In this environment, manufacturers prospered by relying on huge production runs of products that could not be customized or personalized. One of the shifts that e-commerce is bringing about is a reduction in information asymmetry among market participants (consumers and merchants). Preventing consumers from learning about costs, price discrimination strategies, and profits from sales becomes more difficult with e-commerce, and the entire marketplace potentially becomes highly price competitive. At the same time, online merchants gain considerable market power over consumers by using consumer personal information in ways inconceivable 10 years ago to maximize their revenues.

EIGHT UNIQUE FEATURES OF E-COMMERCE TECHNOLOGY

Figure 1.2 illustrates eight unique features of e-commerce technology that both challenge traditional business thinking and explain why we have so much interest in e-commerce. These unique dimensions of e-commerce technologies suggest many new possibilities for marketing and selling—a powerful set of interactive, personalized, and rich messages are available for delivery to segmented, targeted audiences. E-commerce technologies make it possible for merchants to know much more about consumers and to be able to use this information more effectively than was ever true in the past. Online merchants can use this new information to develop new information asymmetries, enhance their ability to brand products, charge premium prices for high-quality service, and segment the market into an endless number of subgroups, each receiving a different price. To complicate matters further, these same technologies make it possible for merchants to know more about other merchants than was ever true in the past. This presents the possibility that merchants might collude on prices rather than compete and drive overall average prices up. This strategy works especially well when there are just a few suppliers (Varian, 2000a). We examine these different visions of e-commerce further in Section 1.2 and throughout the book. Each of the dimensions of e-commerce technology illustrated in Figure 1.2 deserves a brief exploration, as well as a comparison to both traditional commerce and other forms of technology-enabled commerce.

WHY STUDY E-COMMERCE?

Ubiquity

In traditional commerce, a marketplace is a physical place you visit in order to transact. For example, television and radio typically motivate the consumer to go someplace to make a purchase. E-commerce, in contrast, is characterized by its u biquity: it is available just about everywhere, at all times. It liberates the market from being restricted to a physical space and makes it possible to shop from your desktop, at home, at work, or even from your car, using mobile e-commerce. The result is called a market space—a marketplace extended beyond traditional boundaries and removed from a temporal and geographic location. From a consumer point of view, ubiquity reduces transaction costs—the costs of participating in a market. To transact, it is no longer necessary that you spend time and money traveling to a market. At a broader level, the ubiquity of e-commerce lowers the cognitive energy required to transact in a market space. Cognitive energy refers to the mental effort required to complete a task. Humans generally seek to reduce cognitive energy outlays. When given a choice, humans will choose the path requiring the least effort—the most convenient path (Shapiro and Varian, 1999; Tversky and Kahneman, 1981).

Global Reach

E-commerce technology permits commercial transactions to cross-cultural, regional, and national boundaries far more conveniently and cost-effectively than is true in traditional commerce. As a result, the potential market size for e-commerce merchants is roughly equal to the size of the world’s online population (an estimated 3.1 billion in 2015) (eMarketer, Inc., 2015a). More realistically, the Internet makes it much easier for start-up e-commerce merchants within a single country to achieve a national audience than was ever possible in the past. The total number of users or customers an e-commerce business can obtain is a measure of its reach (Evans and Wurster, 1997).

In contrast, most traditional commerce is local or regional—it involves local merchants or national merchants with local outlets. Television and radio stations, and newspapers, for instance, are primarily local and regional institutions with limited but powerful national networks that can attract a national audience. In contrast to e-commerce technology, these older commerce technologies do not easily cross national boundaries to a global audience.

Universal Standards

One strikingly unusual feature of e-commerce technologies is that the technical standards of the Internet, and therefore the technical standards for conducting e-commerce, are universal standards—they are shared by all nations around the world. In contrast, most traditional commerce technologies differ from one nation to the next. For instance, television and radio standards differ around the world, as does cell phone technology. The universal technical standards of e-commerce greatly lower market entry costs—the cost merchants must pay just to bring their goods to market. At the same time, for consumers, universal standards reduce search costs—the effort required to find suitable products. And by creating a single, one-world marketspace, where prices and product descriptions can be inexpensively displayed for all to see, price discovery becomes simpler, faster, and more accurate (Banerjee et al., 2005; Bakos, 1997; Kambil, 1997). Users, both businesses and individuals, also experience network externalities—benefits that arise because everyone uses the same technology. With e-commerce technologies, it is possible for the first time in history to easily find many of the suppliers, prices, and delivery terms of a specific product anywhere in the world, and to view them in a coherent, comparative environment. Although this is not necessarily realistic today for all or even most products, it is a potential that will be exploited in the future.

Richness

Information richness refers to the complexity and content of a message (Evans and Wurster, 1999). Traditional markets, national sales forces, and small retail stores have great richness: they are able to provide personal, face-to-face service using aural and visual cues when making a sale. The richness of traditional markets makes them a powerful selling or commercial environment. Prior to the development of the Web, there was a trade-off between richness and reach: the larger the audience reached, the less rich the message. E-commerce technologies have the potential for offering considerably more information richness than traditional media such as printing presses, radio, and television because they are interactive and can adjust the message to individual users. Chatting with an online salesperson, for instance, comes very close to the customer experience in a small retail shop. The richness enabled by e-commerce technologies allows retail and service merchants to market and sell “complex” goods and services that heretofore required a face-to-face presentation by
a sales force to a much larger audience.

Interactivity

Unlike any of the commercial technologies of the twentieth century, with the possible exception of the telephone, e-commerce technologies allow for interactivity, meaning they enable two-way communication between merchant and consumer and among consumers. Traditional television, for instance, cannot ask viewers questions or enter into conversations with them, or request that customer information be entered into a form. In contrast, all of these activities are possible on an e-commerce site and are now commonplace with smartphones, social networks, and Twitter. Interactivity allows an online merchant to engage a consumer in ways similar to a face-to-face experience.

Information Density

E-commerce technologies vastly increase information density—the total amount and quality of information available to all market participants, consumers, and merchants alike. E-commerce technologies reduce information collection, storage, processing, and communication costs. At the same time, these technologies greatly increase the currency, accuracy, and timeliness of information—making information more useful and important than ever. As a result, information becomes more plentiful, less expensive, and of higher quality.

A number of business consequences result from the growth in information density. In e-commerce markets, prices and costs become more transparent. Price transparency refers to the ease with which consumers can find out the variety of prices in a market; cost transparency refers to the ability of consumers to discover the actual costs merchants pay for products (Sinha, 2000). But there are advantages for merchants as well. Online merchants can discover much more about consumers; this allows merchants to segment the market into groups willing to pay different prices and permits them to engage in price discrimination—selling the same goods, or nearly the same goods, to different targeted groups at different prices. For instance, an online merchant can discover a consumer’s avid interest in expensive exotic vacations, and then pitch expensive exotic vacation plans to that consumer at a premium price, knowing this person is willing to pay extra for such a vacation. At the same time, the online merchant can pitch the same vacation plan at a lower price to more price-sensitive consumers. Merchants also have enhanced abilities to differentiate their products in terms of cost, brand, and quality.

Personalization/Customization

E-commerce technologies permit personalization: merchants can target their marketing messages to specific individuals by adjusting the message to a person’s name, interests, and past purchases. Today this is achieved in a few milliseconds and followed by an advertisement based on the consumer’s profile. The technology also permits customization—changing the delivered product or service based on a user’s preferences or prior behavior. Given the interactive nature of e-commerce technology, much information about the consumer can be gathered in the marketplace at the moment of purchase. With the increase in information density, a great deal of information about the consumer’s past purchases and behavior can be stored and used by online merchants. The result is a level of personalization and customization unthinkable with traditional commerce technologies. For instance, you may be able to shape what you see on television by selecting a channel, but you cannot change the contents of the channel you have chosen. In contrast, the online version of the Financial Times allows you to select the type of news stories you want to see first and gives you the opportunity to be alerted when certain events happen. Personalization and customization allow firms to precisely identify market segments and adjust their messages accordingly.

Social Technology: User-Generated Content and Social Networks

In a way quite different from all previous technologies, e-commerce technologies have evolved to be much more social by allowing users to create and share content with a worldwide community. Using these forms of communication, users are able to create new social networks and strengthen existing ones. All previous mass media in modern history, including the printing press, used a broadcast model (one-to-many) where content is created in a central location by experts (professional writers, editors, directors, actors, and producers) and audiences are concentrated in huge aggregates to consume a standardized product. The telephone would appear to be an exception but it is not a mass communication technology. Instead, the telephone is a one-to-one technology. E-commerce technologies have the potential to invert this standard media model by giving users the power to create and distribute content on a large scale and permit users to program their own content consumption. E-commerce technologies provide a unique, many-to-many model of mass communication. Table 1.2 provides a summary of each of the unique features of e-commerce technology and their business significance.

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