Subject: Managing the Digital Enterprise | Digital Markets (text only)
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Date: Tue, 23 Jan 2001 11:01:53 -0500

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MANAGING THE DIGITAL ENTERPRISE

PROFESSOR MICHAEL RAPPA

DIGITAL MARKETS

It is now commonplace to speak of "Internet time" as a kind of hyper-reality in which the wheels of business move at lightning speed. Every where you look, it seems, new web markets pop-up instantaneously with a hoard of dot-coms just a mouse click away yearning for your business.

As access to the web spreads to millions more consumers, markets that were once local attain national and global reach. Take, for example, the corner bookstore. Ordinarily it is a modest establishment, where the proprietor might stock a few thousand titles, with a focus on recent publications and classics. The Internet, in contrast, breeds a supercharged seller, nothing less than the "Earth's Biggest Selection" of books with 12 million customers in more than 160 countries. Not satisfied to offer millions of titles for sale, Amazon.com has expanded its services to online auctions, music, videos, DVDs, toys and games, and electronics. All this from a company founded in 1995.

If that were not enough, consider this: Unless you live in a big city or a university town, chances are the corner bookstore is, in fact, the one and only purveyor of books at your disposal. On the Internet, there are countless booksellers competing for your business around the clock (or in today's parlance, 24-by-7).

Don't take my word for it -- look for yourself. Say you want to purchase Patricia Seybold's bestseller, Customers.com (which presently ranks in the top-100 on Amazon's sales list). You could buy it from Amazon. Or you could take a moment to shop around. A typical search can yield over 50 merchants from whom the book could be purchased. The price ranges from US$7.98 (from a used-book dealer) to US$26.93. The prices exclude shipping charges, which vary based on the desired delivery time and location. Amazon's price is US$16.50. The publisher's suggested retail price for the book is US$27.50. Thus, in less than a few seconds and a couple of clicks, comparison shopping on the web at the very best provides a 71% discount off the list price. This particular example also points to how the market for "used goods" will play an increasingly larger role in consumer purchases.

Besides the monetary savings, what you just saw is really quite remarkable. From an economist's point of view, we conducted a transaction in which the search costs (of finding the best deal, however we might define it) are approximately nil for individuals with access to the web. Furthermore, for certain kinds of commodity or standardized goods the buyer has something close to, if not, perfect information of the material facts about the market beforehand. Finally, it would cost next to nothing for the buyer to switch their purchasing habit between different sellers. Negligible search costs, perfect information, and low switching costs -- prior to the web, for most consumers, this was simply unheard of.

The corner bookstore will remain for many a cherished institution. But the web can offer consumers a desirable alternative in terms of price, selection, and in some circumstances convenience. The bookstore -- and the storefront, in general -- will transform to take advantage of its uniqueness as a physical place. Already we find some bookstores remaking themselves as a "showroom", where consumers can comfortably inspect merchandise in a pleasant atmosphere while enjoying coffee and music, and then carry home their purchases. Another tactic is to leverage the bookstore's ability to act as a neighborhood meeting place, highlighting the social function of consumption with book readings and "meet the author" gatherings. To view the web as a pure substitute for the physical world of commerce is far too simplistic. The competition created by the web will in many instances make "Main Street" a more interesting place to visit.

Question to ponder:

Discuss how the Web changes the nature of market competition in the Forum.

Learning Objectives:

Establish a basic understanding of the Internet as a communication network;
Understand the Internet's evolution from an historical perspective;
Examine the centrality of communication networks in how business activity is organized;
Explore how the Internet is causing the rules of business to change;
Explore how the Internet is causing global markets to change;
Understand the ways in which information technologies are changing society;
Examine some of the causes underlying the rapid growth of e-commerce;
Explore the implications for managing an enterprise in which the Internet is a central feature of how it operates.

Things to read:

Communication and Collaboration in a Landscape of B2B eMarketplaces
David Roddy, Leo Obrst, Adam Cheyer, VerticalNet

Pricing Strategies on the Web: Evidence from the Online Book Industry
Karen Clay, et al., Carnegie Mellon Univ.
PDF | 122K

The Emerging Role of Electronic Marketplaces on the Internet
Yannis Bakos, New York University
PDF | 125K

Capitalist Econstruction
Chip Bayers

In the news:

Divining the Nature of Business
Bob Tedeschi | 10.02.00

Tech companies wary of online exchanges
Melanie Farmer | 06.13.00

The Long, Long Wait for Cars
Keith Bradsher | 05.09.00

3 Automakers Plan Private Online Purchasing System
Keith Bradsher | 02.26.00

Marketplaces for B2B Transactions
Bob Tedeschi | 01.24.00

Exploring the Amazon
Paul Solman | 07.07.99

Hungry minds:

The Nature of Competition among Online Travel Agents
Eric K. Clemons, Il-Horn Hann and Lorin M. Hitt, Univ. of Pennsylvania
PDF | 174K

Reducing Buyer Search Costs: The Role of Electronic Marketplaces
Yannis Bakos, New York University
PDF | 128K

Spontaneous Specialization in a Free-Market Economy of Agents
Hanson and Kephart, IBM Research

Value-Oriented Electronic Commerce
Munindar Singh, NC State University
PDF | 128K

The Next Economy?
J. Bradford De Long, UC-Berkeley
A. Michael Froomkin, University of Miami

Places to visit:

NetMarketMakers

Vertical Net

Humor Break:

An E-Mail from Lars? Doonesbury by G. B. Trudeau

Previous topic:

Business Models

Next topic:

Intelligent Agents

© 2001 Michael Rappa