E-Commerce

Throughout history, innovations in communication technology have been associated with important developments in the manner in which people and organizations engage in economic exchanges of goods and services (Beniger 1986). In the past several decades, communication technology researchers have examined the social and economic implications of the use of computer networks as a medium for supporting commercial exchange, an activity that is broadly termed electronic or e-commerce.

Research on e-commerce has linked its growth to a wide range of social and economic issues including but not limited to the following: economic considerations of its effect on markets (Malone et al. 1987; Wigand & Benjamin 1995) and the pricing strategies of sellers (Shapiro & Varian 1999; Smith et al. 2000); marketing and strategic behavior of firms including the viability of e-commerce business models (Weill & Vitale 2001), multichannel e-commerce (Steinfield et al. 2002), and competitive strategy (Porter 2001); consumer behavior issues such as privacy and trust (Chadwick 2001; Palmer et al. 2000); site design and navigation logics to enhance usability and help buyers find products among the vast numbers of vendors and products (Dieberger et al. 2000; Lohse & Spiller 1998); organizational and sociological aspects of exchange such as the influence of e-commerce on the relationships between buyers and sellers (Kraut et al. 1999); geographical and social aspects such as the role of e-commerce in developing countries (Mansell 2001), its use as a tool for promoting local business and regional clusters (Steinfield 2004), and its role in national and global commerce (Bouwman 1999).

Definitions And Dimensions Of E-Commerce

Most commonly, e-commerce is considered to refer to the buying and selling of goods and services over a computer network, and mainly over the Internet. One concern is whether e-commerce includes any exchange of information that facilitates transactions, or must include either an actual order or online payment. In general, communications researchers examining this issue lean toward more inclusive definitions that recognize the role of information and communication technologies (ICTs) in commerce, including support for production of goods and services, the preparation of transactions, and the completion of transactions (Hawkins et al. 1999).

Other relevant dimensions of e-commerce that concern researchers are the role of the parties involved and the platform over which transactions occur. Related to roles of the participants, business-to-business (B2B) transactions are investigated differently than business-to-consumer (B2C) transactions. The former are more likely to be upstream (i.e., acquisition of inputs by producers) transactions involving producers and suppliers, but can also involve downstream transactions between the producers of goods or services and distribution channel partners. In either case, B2B relationships are typically longer in duration, involve higher volumes and value amounts, and are normally structured by contracts (Kaplan & Sawhney 2000). B2C transactions, however, are those that take place directly at the retail level, and typically do not imply the same degree of relational stability between buyers and sellers. The way in which e-commerce is structured, and its influences on buyer–seller relations, are therefore quite different in these contexts. Another role pattern that has stimulated research is represented by services like eBay that support consumer-to-consumer (C2C) selling, and thus expose many issues surrounding how to build trust among strangers so that transactions may occur (Resnick & Zeckhauser 2002).

Platform issues refer to the nature of the ICT infrastructure through which transactions are mediated. In earlier times, communication researchers looked at other types of electronic information service delivery platforms, such as videotex for consumers and electronic data interchange (EDI) for business-to-business transactions. One primary concern in these prior studies was the importance of the openness of the platform – EDI-based networks, for example, were typically constructed around a closed set of invited trading partners, and often were dominated by one powerful player (Hawkins & Verhoest 2002).

The main focus in recent e-commerce work is on the Internet, which differs in terms of the greater ease with which new trading partners can be accessed, and the lower costs that participants incur. In addition, a limited amount of research has also focused on wireless infrastructures connecting to mobile devices to support mobile or m-commerce (Balasubramanian et al. 2002). As mobile devices and networks become more capable, their use will likely increase the overall commercial impact of electronic commerce by: (1) increasing network access given that more people use mobile devices than computers; (2) creating new opportunities for spontaneous commerce because it frees consumers from their desktops and allows anytime/anyplace interactions; and (3) promoting location-based and context-relevant commercial opportunities.

Effects Of E-Commerce On Markets, Market Structures, And Prices

One of the earliest questions raised by researchers was whether the use of e-commerce would enable the rise of electronic markets characterized by lower transaction costs particularly in the business-to-business realm (Malone et al. 1987). Transaction costs include such factors as the search for trading partners, negotiation, settlement, and monitoring. By reducing these costs, and hence the costs of coordination with the market, markets would be used for governance (i.e., as a means to control the behavior of the participants) in situations that heretofore were governed by hierarchy (i.e., a company would purchase needed inputs from external suppliers in a market rather than produce them in-house). E-commerce permits companies to find suppliers regardless of location, freeing them up from the constraints of geography, and thereby reduces vulnerability caused by a need for specific assets that potentially could make them victims of opportunistic behavior. Although there has certainly been growth in outsourcing on a global scale, the role of e-commerce per se in this is not well understood. Indeed, studies that have explicitly looked at the extent to which the use of network-based transactions has encouraged a “move to the market” have not found this effect. Kraut et al. (1999) found instead that companies were more likely to use computer networks to enhance their ability to work with established trading partners, resulting in what Malone et al. (1987) called electronic hierarchies.

A related debate is rooted in the belief that e-commerce enables a buyer or seller to bypass intermediary actors in order to engage in a direct transaction and eliminate the excess costs of intermediation. In this view, producers can use the Internet to sell directly to end consumers rather than selling through retailers, for example. Likewise, home sellers might sell directly to homebuyers rather than paying a commission to an agent. Such “dis-intermediation” can profoundly reshape the structure of industries and the roles of actors within an exchange network. Although examples of dis-intermediation are readily observable, the literature encourages a more nuanced view. Just as the Internet can lower transaction costs for producers interested in bypassing intermediaries, it can also enhance the efficiency of existing and new intermediaries. Many of the most well-known Internet commerce companies, in fact, are new intermediaries such as Amazon, eBay, and Craigslist. Additionally, many traditional offline intermediaries – often large retailers who leverage complementary assets such as their brand, their supplier relations, and existing infrastructure – have established online channels as well in a process termed “reintermediation” (Chircu & Kauffman 2000; Sarkar et al. 1995).

For a variety of reasons, e-commerce is also linked with expectations of lower prices of goods and services. Reduced transaction costs, lower costs due to the ability to sell without maintaining physical presence in a market, and the fact that buyers can easily search and compare prices across many vendors all contribute to the hypothesis that one ecommerce impact will be pressure on sellers to reduce prices (Bakos 1997). Yet, again, research shows that the situation is more complex. By 2007, the evidence for lower prices was rather mixed, especially when the added costs for shipping are taken into account. In addition, there is evidence of price dispersion rather than homogeneous prices, contrary to the expectations of economists (Smith et al. 2000). It appears that because it is so easy to change prices (referred to as menu costs), Internet companies make more changes in smaller increments in order to respond to the market. E-commerce also makes it easier to engage in price discrimination, whereby vendors sell the same product to different customers at different prices (Shapiro & Varian 1999).

Also, e-commerce can be used in ways that lock in buyers rather than reducing the so-called market frictions that make it difficult to switch vendors. For example, companies can gather information from customers, and then use this to help offer highly personalized services, or provide incentives to keep customers returning to their website, in order to create what has been called “sticky” e-commerce (Shapiro & Varian 1999). In this way, ecommerce raises customers’ switching costs (the costs to move to a different supplier of a good or service). Network effects, which create positive feedback loops so that the larger the service, the more attractive it is to users, also work to make it difficult for customers to switch. Hence, these techniques allow an e-commerce vendor to maintain higher prices and discourage new entrants who might compete on price.

Business Models In E-Commerce

Much was written in the early stages of e-commerce about Internet business models (Weill & Vitale 2001). Mainly, these authors provided typologies of alternative models, based upon the sources of value for buyers and sellers and the specific mechanisms (e.g., advertising, subscription, margin on sales, etc.) by which revenue was derived. After the dot-com crash, attempts to list the many observed Internet business models gave way to analyses focusing on what was wrong with the models. Critics of the early business-model literature point out that the dominant focus on revenue streams encouraged firms to ignore other benefits that e-commerce offers, such as cost reductions, improved customer relations, or enhanced performance of traditional channels (Steinfield et al. 2002). For example, a traditional retailer might develop an online storefront, but can use its website to generate more traffic in its physical stores by offering coupons or searches of in-store inventory, rather than evaluating the online site purely on the basis of the exclusive sales it generates on its own. Business models were also easy to imitate, and therefore did not necessarily convey a sustained competitive advantage.

Despite the critiques, the development of e-commerce has enabled the application of many innovative online selling strategies. The dot-com crash can be viewed as an inevitable shake-out that follows from the rapid entry of firms into a new area of business. In this perspective, the models that survived represent the winning approaches, promising significant opportunity for the firms that have successfully adopted them.

One issue related to both market structure and the business model of an e-commerce company derives from the statistical patterns of e-commerce site visits. Adamic & Huberman (2001) demonstrated that e-commerce site usage follows a power-law distribution, with a small number of sites accounting for the vast majority of traffic volume. This leads to an expectation of a winner-take-all market. However, more recently, the “long tail” distribution is proposed to explain the dominance of niche products and markets on the Internet (Anderson 2006). The reach of the Internet, enhanced by recommender systems and other methods of connecting people to content, products, and services, enables items that are not “hits” to find enough of a market to be profitable. E-commerce vendors are encouraged by this to carry a wide selection of products rather than focusing only on the popular ones.

Trust In E-Commerce

How to establish trust in online commerce is one of the most heavily research e-commerce areas, becoming an issue when thousands of new and unfamiliar dot-com companies flooded the Internet (Jarvenpaa & Tractinsky 1999). Factors that are linked to the formation of trust include website quality, presence of web assurance seals from trusted third parties, use of secure servers for transactions, and specification of privacy policies (Palmer et al. 2000).

One approach to the trust issue, pioneered by eBay, but now widely used in many ecommerce contexts in one form or another, is the use of reputation systems to build trust. Feedback systems whereby buyers and sellers rate each other have been shown to be remarkably effective in overcoming trust problems despite the potential that exists to “game” the systems to build better reputations (Resnick & Zeckhauser 2002). Collectively, the use of other peoples’ behaviors and opinions – either through explicit communication or derived through implicit data-mining techniques – to serve as a guide to making choices in online contexts has come to be called social navigation (Dieberger et al. 2000).

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