Electronic Markets


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.


Figure: Monopolistic 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).

  • Schlueter-Langdon, C. 2001. Electronic Markets and Networks Change Industry Structure [Elektronische Märkte und Netze ändern Industriestrukturen]. Frankfurter Allgemeine Zeitung (January 11): 9.

  • The 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).























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Last modified: May 13, 2007