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The New Economicsof E-Commerce:
Interpreting the Marketplace
Robert J. KauffmanCarlson School of Management
University of Minnesota
Based on (1) R. J. Kauffman and E. A. Walden,“Economics and Electronic Commerce: Survey and Directions for Research,”International Journal of Electronic Commerce, 5, 4 (June 2001), 4-115, (2) Q. Dai and R. J. Kauffman, “Business Models forInternet-Based E-Procurement and B2B Electronic Markets: An Exploratory Study, in Proceedings of the 34th Hawaii InternationalConference on Systems Science, Maui, HI, January 2001, IEEE Computer Society Press, Los Alamitos, CA, 2001, (3) A. M. Chircu andR. J. Kauffman, “Reintermediation Strategies in Business-to-Business Electronic Commerce,” International Journal of ElectronicCommerce, 4, 4 (Summer 2000), 7-42, and (4) A. M. Chircu and R. J. Kauffman, “Strategies for Internet Middlemen in theIntermediation / Disintermediation / Reintermediation Cycle. Electronic Markets, 9, 2 (February 1999), 109-117.
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Speaker’s BiographyRobert J. Kauffman is Professor and Department Chair of Information and Decision Sciences at theCarlson School of Management, University of Minnesota. His current research interests center on IT andorganizational strategy, electronic commerce, adoption and diffusion of technology, the economics ofinformation systems, applications of IT in financial services, and measuring the value of IT investments. Hereceived a B.A. from the University of Colorado, Boulder, an M.A. from Cornell University, and an M.S. andPh.D. from the Graduate School of Industry Administration, Carnegie Mellon University. Rob has heldfaculty positions at New York University and the University of Rochester. His research appears inInformation Systems Research, MIS Quarterly, Decision Science, Communications of the ACM, Journal ofManagement Information Systems, Journal of the Association of Information Systems, IEEE Transactions onSoftware Engineering, and International Journal of Electronic Commerce.
He has twice co-chaired the annual Workshop on Information Systems and Economics (WISE) Rob alsoacts as an associate editor for Management Science, International Journal of Electronic Commerce,International Journal of Intelligent Systems in Accounting, Finance and Management, Journal ofManagement Information Systems, and the newly- announced Information Systems and E-BusinessManagement. His newest research article, due out in Organization Science in November/December 2001, ison reservation system competition in the airline industry. He also completed a special issue of the Journalof Management Information Systems on “Economics, Electronic Commerce and Organizational Strategy,”which is due out in Fall 2001. This follows up a prior issue of Communications of the ACM that he edited inAugust 1998 on “Economics and Information Systems.” In his spare time, Rob likes to travel, sail smallboats, and play the piano. He lives with his wife, Jean, and daughter, Lauren, in Bloomington, Minnesota.
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‘The EBay of Blank … ?’
n Internet IPOs: Wit Capitaln On-line stock trading: Charles Schwabn Electronics retailing: Buy.comn Books: Amazon.comn B2B E-Markets: E-Steel.com
But the opportunities aren’t like they used to be – at leastwhen venture capital is required.
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Driving Principles inElectronic Commerce?
n Spacen Timen Valuen Efficiencyn Markets
n Transactionsn Impulsen Growthn Mattern People
Ask: What principles can be leveraged for competitive advantage in your context?
Source: Business 2.0, http://www.business2.com/magazine/2000/03/20735.htm
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Why Examine E-Commercefrom Economics Perspective?n Depth and breadth of the applicable
theoryn Maturity, rigor and precision of the
analytical techniquesn Natural emphasis on decisionmakers,
products, processes, firms, markets andaggregate economic behavior
n Power of econometric methods tohandle large-scale data analysis
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MACRO
PRODUCTS
TECHNOLOGY
MARKETS
BUSINESS PROCESSES
EN
AB
LE
SENABLES
DEFINE DEFINE
USE USE
ENABLESA
GG
RE
GA
TE
ANALYSIS LEVELS
ACTORS
AGGREGATED
DISAGGREGATED
VALUE MAKERS VALUE TAKERS
CONSUMERS --SocietyGroupsIndividuals
FIRMS --CompetitorsAlliancesIndustries
MACRO
PRODUCTS
TECHNOLOGY
MARKETS
BUSINESS PROCESSES
EN
AB
LE
SENABLES
DEFINE DEFINE
USE USE
ENABLESA
GG
RE
GA
TE
ANALYSIS LEVELS
ACTORS
AGGREGATED
DISAGGREGATED
VALUE MAKERS VALUE TAKERS
CONSUMERS --SocietyGroupsIndividuals
FIRMS --CompetitorsAlliancesIndustries
A Framework forE-Commerce Research
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Applicable Economic Theories
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Let’s Talk About …
n I. Technologiesn II. Business processesn III. Electronic markets and e-intermediationn IV. Firm strategies in the marketplace
… all through the interpretative lens of economic theory and thinking
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I. Technologies
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Initial Wordsfor the Network-Wise
“Almost any decision about a given technicalsolution will be risky, until it becomes clearthan there is sufficient installed base for thesolution to become cost-effective and value-
effective as a network.”n Standards combat among e-commerce solution
providers complicate matters
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Contested Groundn There are many domains in e-commerce in
which standards combat is occurring:n DotCom and e-business infrastructuresn Web-based travel reservation systemsn Internet-based B2B procurement markets
n E-billing is a good example -- no longer arevolution, but an evolution that we are seeingin the marketplace ... and it’s focused on IT
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Integrion’s Solution Sounded Great
Owners included:• B of A• Citibank• and more banks• IBM
In theory, atleast ………..
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But Who Will Win in E-Billing?
Microsoft is behind Transpoint too. What does this tell us?And so is Citibank … Real options, here, don’t you think?Nobody knew how this combat would come out.
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Network Externalities Tell Youn The value of a technology standard
increases with the number of adoptersn Externalities grow over time
Network Value
# of Adopters
Highest Attainable Value
A
B
CHow will we knowwhat the valuetrajectory will be?
Time ?
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Amidst This Standards Combatn Senior managers must think about IT
investments consistent with thevalue trajectory fornetwork externalities
n Don’t want to get on thewrong “bandwagon”
n So waiting has “real optionvalue”
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Tap Into Installed Basen Larger network installed bases are consistent
with higher valuation and earlier corporateadoption of technological innovations
n Installed base: examples --n number of vendors in an e-billing networkn number of search engine usersn number of firms using XMLn number of buyers/sellers in an e-auction
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But Timing is aBig Gamble
n Whom do we bet on?n Banks?n Consolidators?n Internet portals?n Software solution
vendors?n Translation: Who’s in the position to
generate the greatest externalities soon?
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Seek Out “Spatial” Externalities, Too
eBay’s recent alliance with AutoTrader.Com is a good casein point: excellent externality growth, but regional focus.
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Be Market Savvy on Standards
"Take advantage of the wisdom of themarket in gauging the value ofstandards; markets, even if they arewrong sometimes, are usually notwrong for long."
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II. Business Processes
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IT Used to Mass Customizein E-Commerce
n The product:n physical goods and
information goodsn create unique
product bundles
n The sellingprocess:n one-on-one
marketing with ITn create unique
value propositionsby segment
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IT Used to SelectivelyCommoditize Products
to Create Liquidity
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A trusted third-partymade all the differencein enhancing transactabilityof used cars in this e-market
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IT Used for Product Rebundling
n Natural market re-segmentationbased on consumer preferences
n “Death spiral” and “adverseselection”
n Product and service, or both?
Leverage the unique capabilitiesof the firm with IT
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Add Agents to the Processn Everything we sell is going to
the Internet, where businessand retail customers can easilycompare prices, service
n Ask: Are your “agents”working for you?
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III. Electronic Markets and E-Intermediation
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Operational Efficiency --An Intermediary Issue
n Reduce your costs byengaging the “right” kinds ofmiddlemenn B2C: infomediariesn B2B: e-procurement exchanges
n Ask: How can we provideaggregation, buying power,matching and businessintelligence? And more?
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Traditional Industry ValueChain -- Retail Example
Producer Wholesaler Retailer Consumer
Note: Example based on Benjamin, R., and Wigand, R. "Electronic Markets and Virtual Value Chains on theInformation Superhighway," Sloan Management Review, 36, 2, Winter 1995, pp. 62-72.
n Ask: Are the value chain costs acceptable?
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Wholesaler Retailer
Wholesaler
Identify Your AlternativeIndustry Value Chains
Producer Wholesaler Retailer Consumer
Producer Retailer Consumer
Producer Consumer
Cost: $52.72
Cost: $41.34
Cost: $20.45
Partial Value Chain Disintermediation
Traditional Value Chain
Full Value Chain Disintermediation
X
X X
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Source: Jupiter Communications, “US Business to Business Trade Projections,” September 2000.
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We are here
Models for Trade Between Buyers and Sellers, 1997-2003
Source: Jupiter Communications, “US Business to Business Trade Projections,” September 2000
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B2B Procurement Markets
n Support market functions and mgmt requirementsn Provide technology infrastructures, business modelsn Function as “technology adapters” in marketplace
Technology Adapters: - Integrators - Standards providers - Outsourcing vendors
Basic Market Functions: - Aggregation - Matching - Facilitation
Management Needs: - Market intelligence - Business relationships - Business processes
Source: Dai and Kauffman (2001)
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E-Market Function: Aggregationn Private, buyer-
specific e-catalogingn Pre-qualified
suppliersn Prices are negotiated
offlinen System integration
and connectivity isimportant
n Schlumberger, Inc.,and CommerceOne
n Public, buyer-neutrale-catalogingn Adopted for
purchases in smalllot quantities
n Demand is of lowpredictability andhigh variety
n Low price volatilityn SciQuest.com
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Source: www.SciQuest.com
SciQuest.com – Public E-Catalog§ SciQuest.com aggregates product catalogs for pharmaceutical, chemical and biotechnology industries.
§ Lists 600 suppliers, and more than 1 million products.
§ Buyers can search and shop among all catalogs.
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A Net Market
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E-Market Function: Matching
n Private negotiationmechanismn Preselect
participants for bidsn Used for purchasing
direct goods in largequantities
n e-Steel.com
n Public biddingmechanismn Open bidsn Especially suitable
for exchangeexcess capacitiesand inventories
n FastParts.com
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Public Bidding: FastParts.comn To serve procurement
professionals with “excessinventories on cancelled jobsand inventory shortages forunforecasted orders”.
n In SOLD!Auction, sellerspost offers to all memberswho bid against each otherin an anonymous context.
Source: www.FastParts.com
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Dynamic Trading Processes: Pradium
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E-Market Function: Facilitation
n Online transaction settlement: Net marketmakers are partnering with financialinstitutions and transportation providers tooffer services for transaction settlement.
n Procurement expertise: General andindustry-specific purchasing expertise arevalue-adding services provided by onlinemarkets.
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Online Financial Services
n Internet-based financial services: Electronicpayment, electronic invoicing, credit facilities,foreign exchange, wire transfer, and automaticclearinghouse.
n For example: Ariba ispartnering withAmerican Express andBank of America todevelop a line of B2Bonline financial service
Source: www.Ariba.com
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Settlement for Deliveryn Delivery and logistics: Smooth information flow
among multiple players in the process of deliveryis the focus.
n E-markets specialized in delivery andtransportation become logistics providers forother e-markets.
n Example: Optimum-Logistics.com ispartnering withChemConnect.com
Source: www.ChemConnect.com
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Expertise and Market Intelligence
n Procurement expertise is built into tools for costcalculation.n Example: An online bond market, Axess.com provides
analytic and advanced modeling capabilities to helpfixed income securities investors trade their portfolios
n Market intelligence is derived from integrateddata of sales and transactionsn Example: MuniCenter.com, another bond e-market,
acts as an information portal for fixed incomesecurities investors, too
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Expertise, connections
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Market intelligence
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Online Business Process Support:Streamline Workflow
n Workflow management: In document orinformation-intensive industries, business modelsare built to streamline business processes.
Source: www.ChannelPoint.com
n ChannelPoint“streamline[s] andautomate[s] theinsurancedistribution process”
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E-Markets Function As Adapters
n E-markets connect buyers and sellers; formnetworks of participating firms.
n Network externalities – the value of an onlinemarket increases as more firms join it, attractingfurther more participants.
n Compatibility between different technologiespromotes network adoption.
n Adapters set up interfaces between differenttechnologies to enable at least partialcompatibility.
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IV. Firm Strategy in the Market
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What You Can Do …
n Face it: You may not be able to do it allon your own, if you haven’t been earlyto market for e-business opportunities
n Partner for:n Contentn Accessn Application development
n License technology you needn Continuously innovate
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Partner for Content
n Figure out a way to partner with an“aggregator” for selling products andservices in your industry: don’t letothers do it first!
n Competitive advantage sources:n You can customize and brand the contentn You can retain control over your customers’
transactions
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Partnering for content atMicrosoft Expedia: providinglinks to vacation bookingengines
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Partner for Access
n Work with an electronic intermediarythat provides services for other agentsinvolved in e-commercen B2B portal providers
n Competitive advantage sources:n You can try to partner with a leading B2B
portal provider with whom you or theintermediary has an exclusivity agreement
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Partnering for access:eBay sponsors the adsof AutoTrader.com
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Partner for ApplicationDevelopment
n Aggressively establish alliances withestablished e-commerce industryparticipants
n Sources of competitive advantage:n Gather the right combination of assets
(technological and industry-specificexpertise) in a way that is otherwise notpossible
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Amex Travel Related Services’Recent Partnerships
n Microsoft, for online travel bookingn Portable, for expense mgmt
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License Technologyn Find a competent provider from which
to buy the “right” technologyn Share in the profits result from
transactions that are referred to you byother web sites
n Sources of competitive advantage:n The technology is complex enough such
that it cannot be copied easilyn No industry standards are established yet
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Technology Licensing at ITN.Com
Note: ITN.com is nowknown as GetThere.com
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This presentation was prepared as the keynote address forthe Workshop on E-Commerce and Agricultural Markets,held at the Economic Research Service (ERS) of the UnitedStates Department of Agriculture in Washington, DC onMay 28-29. The author offers his thanks to ProfessorsTerry Roe and Hamid Mohtadi of the Applied EconomicsDepartment, University of Minnesota, for suggestions onthe contents. He also thanks his research colleagues atthe Carlson School of Management for all theencouragement they have offered over the years with mythinking and interpretation of developments in themarketplace and directions in e-commerce research.
Acknowledgements
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Contact Information
Robert J. KauffmanProfessor and ChairDept. of Information and Decision SciencesCarlson School of ManagementUniversity of MinnesotaMinneapolis, MN 55455Email: [email protected]: 612-624-8562Fax: 612-626-1316