Internet technology can be used to reduce transaction
cost to make electronic markets (e-markets) a more favorable organization
mechanism of two adjacent business processes than hierarchy. As a result,
e-markets have emerged in many industries at different stages in the
value system. The availability of these e-markets, in turn, is changing
industry structure and requires firms to re-evaluate business strategies.
For one, companies can spin-off or outsource certain operations. For
another, firms may face different competitive dynamics.
In some homogeneous goods markets such as books, e-markets
can increase market transparency and price competition.
The worst-case scenario in this situation is "perfect competition,"
which leaves all sellers with zero profits.
In many of these markets companies are using information
technology to avoid such outcome. One solution is to differentiate service
offerings and to make it more difficult for buyers to switch between
sellers. Examples include Amazon's "one-click-order" process
and America Online's personal calendar function. Once configured, these
features offer superior ease of use and convenience. From an economic
perspective the set-up effort creates switching cost. The more
effort that is spent on customization, the less likely customer
switching will be. This lock-in situation can be exploited for
business advantage. First, lock-in can increase retention and
protect market share. Second,it may also allow a business to charge
higher prices than the competition without the risk of losing all sales
to rivals. This scenario is called "monopolistic competition."
The Figure illustrates its properties. The white dot indicates the long-run
("perfect market") equilibrium of marginal cost being equal
to demand. The black dot marks the short-run solution of a monopolist.
This short-run deviation allows a firm to increase prices by dp
without losing all sales to the competition.
Competition Model (Chamberlin 1933)
A Survey of Industry-Sponsored E-Marketplaces. In: Shaw, M.
J. (ed.). E-Business Management: State-of-the-Art Research,
Management Strategy, and Best Practices. Kluwer Academic
Publishers: Boston, 2002, 277-310 (with Hsin-Lu, C., S. Y.
Shen, and M. J. Shaw).
C. 2001. Electronic Markets and Networks Change Industry Structure
[Elektronische Märkte und Netze ändern Industriestrukturen].
Frankfurter Allgemeine Zeitung (January 11): 9.
Online Retailing Challenge: Forward Integration and E-Backend
Development. In: Proceedings of ECIS July 2000 Conference
held in Vienna, Austria: 1025-1028 (with M. J. Shaw).