E-Commerce: Economics and Regulation

Article excerpt


We no longer need to imagine a world in which trade is conducted through an electronic web of computers and communication devices largely unregulated by nations; that network is known as the Internet. Internet commerce, or e-commerce, describes the commercial activities over this worldwide network or "Web."As indicated in Figure 1, according to the Forrester Research Group, in 1997, U.S. Internet commerce accounted for $8 billion goods and service; by 2002, Internet commerce in is forecast to rise to $327 billion.

Organizational Economic Theory and the E-Commerce

Because the Internet is such a recent phenomenon, empirical models that predict specifically the behavior of firms engaged in e-commerce need to be developed. However, organizational economics provides a useful framework for describing the behavior of firms engaged in e-commerce (Barney & Ouchi, 1986). Organizational economic theory states that firms seek strategies that minimize their costs of negotiating and governing transactions across markets by changing their structures (Jones & Hill, 1988). Controlling agency costs, that is, costs associated with monitoring managers and cooperative partners, is crucial to profitability. Thus, organizational economic theory posits that the "grand strategy" of profitability in doing business over the Internet will be to minimize transaction costs associated with Internet service providers (ISPs) and other middlemen by expanding a firm's control over transactions.

A key element in cost control in any business process is limiting assets used in performing organizational functions. Organizational economic theory holds that when assets are allocated for a specific purpose, they cannot be used for other purposes (Barney). It is assumed that agents waste assets because the agent will act to increase its own benefits; the agent's and principal goals naturally differ (Borys & Jamison, 1989; Ghoshal & Moran; Hill, Hitt, & Hoskisson, 1992).

The specific control of limited assets, the monitoring of agents, gaining maximum flexibility in the ability to redirect assets, and acquiring benefits associated with the agent's assets represent the current center of organizational economics research.

Information as a Nonlimiting Asset

Information is a new asset form; it cannot be thought of in the same way as property, plant and equipment. Information confounds traditional organizational economic analysis because unlike conventional assets that are "specified" once and are, essentially, depleted as transferred, information can be sold over and over again (Fulk & DeSanctis, 1995). Information's multiple asset value can be seen clearly in customer lists and accounts that can be sold to telemarketers, banks, insurance companies, and brokers, while, at the same time they are simultaneously retained by the seller to be sold again.

As indicated in Figure 2, transfers of information over the Internet are relatively easy, requiring only equipment, software, and an on-line service. The equipment is, generally, a computer device which is then switched on to the Internet by a Web browser (specialized software); moving from place to place is the job of the ISP.

Sector Leaders in E-Commerce

Although this section is devoted entirely to describing e-commerce outside of computer, software, and communication companies, it is important to note that at least one equipment manufacturer (Dell Computer) and one software distributor (Egghead) have converted, or are in the process of converting, their entire organization to e-commerce. This conversion includes having no retail outlets, no sales personnel, and no advertising other than over the Internet.

Three sectors have already taken advantage of information as a multi-faceted asset and are embracing e-commerce as a core business strategy:

* Financial Services: Billions of dollars in equity, bond, option, and other investment transactions are moving instantly via electronic trading. …