To access the contents, click the chapter and section titles Economics of Electronic Commerce Go! Keyword Brief Full Advanced Search Search Tips - (Publisher: Macmillan Computer Publishing) Author(s): Soon-yong Choi; Andrew Whinston; Dale Stahl ISBN: 1578700140 Publication Date: 07/22/97 Search this book: Go! Contents About This Book Trademark Acknowledgments Credits Chapter - Electronic Commerce and the Internet Chapter - Characteristics of Digital Products and Processes Chapter - Internet Infrastructure and Pricing Chapter - Quality Uncertainty and Market Efficiency Chapter - Economic Aspects of Copyright Protection Chapter - Signaling Quality and Product Information Chapter - Consumers' Search for Information Chapter - Product Choices and Discriminatory Pricing Chapter - Financial Intermediaries and Electronic Commerce Chapter 10 - Electronic Payment Systems Chapter 11 - Business and Policy Implications of Electronic Commerce Chapter 12 - Future Directions for Economic Research Products | Contact Us | About Us | Privacy | Ad Info | Home Use of this site is subject to certain Terms & Conditions, Copyright © 1996-2000 EarthWeb Inc All rights reserved Reproduction whole or in part in any form or medium without express written permission of EarthWeb is prohibited Read EarthWeb's privacy statement To access the contents, click the chapter and section titles Economics of Electronic Commerce Go! Keyword Brief Full Advanced Search Search Tips (Publisher: Macmillan Computer Publishing) Author(s): Soon-yong Choi; Andrew Whinston; Dale Stahl ISBN: 1578700140 Publication Date: 07/22/97 Search this book: Go! Table of Contents | Next Page - Contents Contents at a Glance Chapter One Electronic Commerce and the Internet Chapter Two Characteristics of Digital Products and Processes 59 Chapter Three Internet Infrastructure and Pricing 93 Chapter Four Quality Uncertainty and Market Efficiency 137 Chapter Five Economic Aspects of Copyright Protection 175 Chapter Six Signaling Quality and Product Information 213 Chapter Seven Consumers' Search for Information 263 Chapter Eight Product Choices and Discriminatory Pricing 313 Chapter Nine Financial Intermediaries and Electronic Commerce 373 Chapter Ten Electronic Payment Systems 407 Chapter Eleven Business and Policy Implications of Electronic Commerce 463 Chapter Twelve Future Directions for Economic Research 539 Index 583 Page Page Table of Contents Electronic Commerce and the Internet 1.1 Developments in Internetworking Distributed and Networked Computing Open Networks Two-way Communications and the Web 1.2 Electronic Commerce 12 Electronic Commerce Examples 13 Electronic Commerce as a Communications Network 15 Electronic Commerce of Digital Products 16 Commercial Potential of the Internet 21 1.3 Market Characteristics of Electronic Commerce 22 Current Commercial Uses of the Internet 23 User Characteristics 25 Competition and Market Organization 27 Business Organization and Virtual Firms 30 Legal Environment 32 1.4 Current Issues in Electronic Commerce 35 Contents and Quality 35 Copyrights versus Users Rights 38 Copyright and the Freedom of Speech 39 Legal and Economic Considerations of Copyrights 40 Interactive Advertising and the Use of Consumer Information 41 Push or Pull Advertising 42 Measuring the Impact of Online Advertising 43 Targeted Advertising and Privacy 44 Internet Intermediaries 45 Security and Privacy of Internet Transactions 46 Page 10 Pricing Strategies for Digital Products 48 Online Taxation, Regulation, and Other Legal Issues 50 1.5 Summary 51 References 53 Suggested Readings and Notes 54 History of the Internet 54 Firms and Markets 54 Electronic Data Interchange (EDI) 55 Internet Resources 55 Implications of Digital Process 55 The Internet Society (ISOC) 56 Characteristics of Digital Products and Processes 59 2.1 What Are Digital Products? 60 2.2 Characteristics of Information Products 64 Dependence on Individual Preference 65 Transitory or Cumulative Utility 65 Externalities of Information Products 66 Intrinsic Values of Digital Products 69 2.3 The Physical Nature of Digital Products 69 Indestructibility 70 Transmutability 72 Reproducibility 73 Physical Nature and Economic Issues 74 Product Selection Strategies Based on the Taxonomy 84 Changing Time Dependence 85 Changing Usage Patterns 85 Transfer Mode and Externalities 86 2.4 Summary 87 References 89 Page 11 Suggested Readings and Notes 89 Value of Information 89 Electronic Markets 90 Network Externalities 90 Internet Resources 91 Java Programming Language 91 Commercial Sites Index 91 Virtual Museums and Florist 91 Medical Sites on the Internet 92 Internet Infrastructure and Pricing 93 3.1 Internet Pipelines 93 3.2 Traffic Control on the Internet 96 Packet Switching 96 Internet Protocol Addresses 97 Transmission Control Protocol 100 Unicast, Broadcast, and Multicast 100 3.3 The Infrastructure Convergence 103 The Convergence in the Last Mile 104 Long-Haul Traffic 107 3.4 Congestion and Infrastructure Pricing 109 Ideal Economic Pricing Proposals 112 Dynamic Optimal Pricing 114 Static Priority Pricing 117 The Smart-Market Approach 118 Connection-Only and Flat-Rate Pricing 119 Voluntary User Declarations 122 Synopsis 122 3.5 Public Policy and Infrastructure 123 Public Policy for a Publicly Owned Network 124 Public Policy for a Privately Owned Network 125 3.6 Summary 127 References 130 Page 12 Suggested Readings and Notes 133 Further Readings on Game Theory 133 Internet Resources 133 The Internet Networking Infrastructure 133 Domain Name Registration 134 MBONE (Multicast Backbone) 134 IETF IP Multicasting Proposals 135 Broadband Online Services 135 Quality Uncertainty and Market Efficiency 137 4.1 Economics of the Lemons Market 139 Price as a Signal for Quality 141 Remedies for the Lemons Problem 143 4.2 Information Channels in Electronic Commerce 145 Sellers Provide Product Information 145 Freeware, Shareware, and Other Promotions 148 Free Products Online 148 The Economics of Try-Outs 150 Third-Party Information 152 Retailers and Other Brokers 153 4.3 Quality and Intermediaries 155 Transactional Efficiencies 156 Intermediaries as Experts 158 Intermediaries as an Information Source 161 Intermediaries as Producers 162 4.4 Intermediaries and Contracts 163 Subcontracting Systems 164 Incomplete Contracts 166 4.5 Summary 169 References 170 Suggested Readings and Notes 171 Economics of the Lemons Problem 171 Repeat Purchases and Reputation 172 Page 13 Internet Resources 173 Internet Commerce 173 Internet and Economics 173 Economic Aspects of Copyright Protection 175 5.1 Economic History of Copyright 176 The Property Aspect of Copyright 178 The Authorship Aspect of Copyright 183 Public Interest 184 5.2 The Nuts and Bolts of Copyrights 186 Objects Covered by Copyright 186 Terms of Copyright 187 Works That Cannot Be Copyrighted 187 Specific Rights of Authors Granted by Copyright 189 Fair Use Doctrine 190 Other Intellectual Property Laws 191 5.3 Copyright Protection and Digital Products 192 Reproduction 192 Reproductions on the Internet 193 Economic Implications of Reproduction 195 Resale and Distribution 195 Resale and the First Sale Doctrine 196 Resale Prevention and Pricing 198 Content Control 200 5.4 Market Protection Through Business Strategies 202 5.5 Policy Implications 204 Copyright and Antitrust Concerns 205 5.6 Summary 207 References 209 Suggested Readings and Notes 210 Historical Development of Copyright Laws 210 Patents and Economics 211 Page 14 Internet Resources 211 Articles 211 Internet Copyright Sites 212 Texts of Copyright Laws 212 World Intellectual Property Organization (WIPO) Conference Resources 212 Signaling Quality and Product Information 213 6.1 Advertising on the Internet 214 Growth in Electronic Advertising 215 Types of Internet Advertising 217 Banner Ads 218 Selling Advertising to Consumers 220 Web Storefronts 222 6.2 The Economics of Advertising 223 The Economic Roles of Advertising 224 The Informational Content of Advertising 231 Information about Information Products 231 The Effect of Advertising on Price 234 Advertising and Product Differentiation 237 6.3 Other Strategies to Convey Product Information 239 Repeat Purchases and Reputation 239 Reputation Building in Electronic Commerce 240 Renting a Reputation 241 Shareware and Wasted Investments 242 Quality Guarantees for Digital Products 243 6.4 Marketing Strategies for the Internet 244 Myths and Popular Wisdom about Online Advertising 245 Broadcast versus Targeted Advertising 246 Push versus Pull Advertising 249 Advertisements as Commodities 251 Passive versus Active Marketing 252 Electronic Malls and Intermediaries 253 Page 15 Is Online Advertising Effective? 254 Providing Consumer Information 256 6.5 Summary 257 References 258 Suggested Readings and Notes 260 Advertising and Competition 260 Signaling 260 Internet Resources 261 Web Directory for Advertising 261 Popular Wisdom on Internet Marketing 261 Shareware Resources 262 Consumers' Search for Information 263 7.1 Consumer Searches and Economic Efficiency 263 Search Costs 265 Consumer Searches and Electronic Commerce 267 Digital Products and Consumer Searches 269 7.2 The Search Market and Intermediaries 270 Search Market Efficiency 271 Search Efficiency in Intermediaries 276 Search Efficiency in Informational Content 278 7.3 Search Engines on the Internet 280 Search or Surf? 281 Inadequacies of Search Engines 281 7.4 Market Efficiency In Various Information Sources 282 The World Wide Web 283 Web Searches 284 Gopher 285 Gopher Search 285 Anonymous FTP and Telnet 286 FTP Search by Archie 287 UseNet 287 Page 16 Mailing Lists 289 Electronic Messaging 290 E-mail Address Search 292 Consumer Learning and Search 292 7.5 Information Efficiency in Web Search Engines 294 Information Acquisition and Efficiency 298 Advertising versus Consumer Searching 305 7.6 Summary 307 References 309 Suggested Readings and Notes 309 Consumer Search 309 Internet Resources 310 Search Engines 310 Software Agents and Filtering 311 Robomoderation 311 Product Choices and Discriminatory Pricing 313 8.1 Product Differentiation and Pricing in Economics 315 method is to overcome the restricting factors of survey forms that ignore nonverbal communications, yet it's difficult to interpret in a meaningful way these nonverbal forms of communication, which often consist of images, metaphors, and other cognitive expressions for which no interpretation consensus exists Experimental research focuses on consumer storytelling through images (Zaltman, 1996) Its premise is that most social communication is nonverbal and thoughts can occur as images For example, when consumers are asked to bring images to describe their experience with a product, they may bring a picture of one of their pets or a rainstorm A picture of a dog represents faithfulness, of course, while the storm hints at turmoil Similarly, Internet users are asked to characterize the color of their e-mail messages Low opinion about e-mail is represented by gray or black colors, while bright colors such as pink and yellow indicate more excitement While this approach to nonverbal communications touches on an important shortcoming in traditional survey methods, images and metaphors Page 569 themselves are hard to interpret To put them in words violates the very premise of "not being able to express in words." However, a less ambitious research environment can be constructed on the Internet Instead of using worded questions and asking for ratings, consumers will be presented with images, games, and other interactive materials By carefully constructing the experimental environment, researchers can capture subjects' natural behaviors and reactions by using cameras, audio inputs, sensitive mice, and so on to monitor actions, emotions, and feelings Instead of inviting consumers to participate in experiments, advertisements and promotional free products will provide a research environment that feeds data back to the seller In a sense, all potential customers will become focus groups, and the products themselves will offer opportunities to gain information about consumers Online Learning Consumers form groups on the net to congregate with like-minded people and exchange opinions UseNet newsgroups divide consumers by interest into hierarchical groupings Thus, those who are interested in computers frequent groups in the comp hierarchy while art-inclined persons participate in rec.arts groups Further divisions of interest result in rec.arts.books for book lovers and rec.arts.books.hist-fiction for those who favor historical novels Along with numerous mailing lists organized to address specific interests, these online communities provide sellers a window for watching consumers learn from each other The power of word-of-mouth marketing has induced many sellers to monitor messages and, if requested, provide relevant information as dutiful members of the interest group There is no indication that today's sellers actively analyze messages posted in these online communities Even product-specific mailing lists managed by sellers disseminate information but not allow postings or feedback from subscribers The vast number of messages being exchanged may be a deterrent to any firm contemplating the mining of such data Instead, sellers rely on traditionally mined data provided by web search operators, market research firms, or brokers of processed customer data The future virtual economy, Previous | Table of Contents | Next Products | Contact Us | About Us | Privacy | Ad Info | Home Use of this site is subject to certain Terms & Conditions, Copyright © 1996-2000 EarthWeb Inc All rights reserved Reproduction whole or in part in any form or medium without express written permission of EarthWeb is prohibited Read EarthWeb's privacy statement To access the contents, click the chapter and section titles Economics of Electronic Commerce Go! 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Previous | Table of Contents | Next Page 570 - however, will consist of finely segmented online communities whose participants include the majority of potential consumers By becoming an active member of these online groups, a seller will maintain contact with all its customers and find out about competitors' strategies as well as consumer responses As producers and sellers learn in a networked market environment, their product selection and pricing strategies will affect both their customers and their competitors For customers, the issues will be the gains in better-matching products and the potential losses in discriminatory prices For competitors, the strategic value of new information will depend on its availability to competitors For example, if the data on the Internet is public, it will offer no competitive advantage, because all competitors will have the same information However, if the data is made private, such information is strategically valuable; therefore, the cost of securing and processing such information will be weighed against the gains in the market share or the profit In all likelihood, the profit potential will justify monitoring and analyzing public messages in some fashion Current economic and marketing models not account for interactions between producers and consumers The market somehow functions to match supply with demand As the uncertainty about product quality and even about the identity of transacting partners grows in the virtual marketplace, however, market agents will no longer be passive The availability of information and the technology to gather and process such information is the hallmark of an electronic market such as the Internet Economic models, then, will have to incorporate the active learning by producers and the effects of such action on product choices, prices, competition, and consumer welfare Just as researchers and corporate employees can collaborate and learn from each other on the Internet, firms and consumers will determine market choices through interacting and learning from each other Such interactive learning will be pervasive in the future virtual economy Page 571 Consumer Customization Customization by consumers occurs in two stages First, products are customized through a selection process in which consumers eliminate unwanted portions of a product Second, products are modified to suit consumer tastes on receipt For example, consumers may ask an online news service to send them news about a specific firm but not about others Either the news producer or an intermediary personalizes the product and delivers it The second stage of customization is not needed in this case Alternatively, consumers may receive the news feed without selecting, but—after receiving all of it—discard unwanted parts In terms of bandwidth efficiency, the second type of delivery is undeniably inferior, but it allows customers more control over the use of information The selection process by which consumers weed out unwanted products is called filtering In the age of information overload, information filtering offers consumers not only the power to select products but also the means to automate repeated tasks by training filtering agents to recognize what is wanted and not wanted For example, e-mail from unwanted sources can be filtered out by a software agent that recognizes the user's preference The same preference profile can also be used to schedule meetings based on certain principles, such as no meetings between a.m and 10 a.m.; project A takes precedent over all other projects; or meetings should be based on the proximity of their location Software agents are either fed such information by the user or programmed to learn by observing and analyzing the user's actions The analysis typically consists of statistical score-keeping; that is, if a user repeats the same action twice or more, the agent recognizes it as the user's preference (Maes, 1994) A logical extension of filtering agents in the future will be a smart product with the capability to learn and adapt to each user's preference Instead of being endowed with this capability, all products will have an open interface to Page 572 interact with any intelligent agent trained by a consumer Thus, each consumer in the virtual economy will have an intelligent agent—a virtual alter ego—to monitor and sort incoming e-mail messages, search for product vendors, alert the user for new products of interest, interact with smart products to configure them to match the user's preferences, and so on When you order an online article, negotiations will be conducted between your agent and the seller's After you buy smart computer software, your agent will customize it for you Your car, house security system, hot water boiler, coffeemaker, and centralized heating system will all be smart and configured and monitored by your agent, which will alert you and recommend a course of action when something is out of order You will be able to display daily temperatures, gas and electricity consumption, boiler efficiency, and other data on your computer or HDTV screen, analyze the data, and exchange the information with others To accomplish this, smart products will have to be furnished with the capability to be customized and have an interface for interacting with smart agents Such an interoperability requirement will not produce a single dominant product but will require some standardization for those features that need interfacing (see the discussion about interoperability in section 11.9) At a minimum, any smart product should adhere to a communications protocol in order to communicate or receive instructions through, for example, e-mail With filtering agents and smart products available to consumers, the debate between push-and-pull models of marketing will become pointless Consumers may in fact prefer sellers to push all information to them so they can choose what is relevant, instead of leaving that decision to the sellers When buyers have all the information, a seller's bargaining position will deteriorate accordingly; thus, sellers will choose what information to send, but buyers will have control over whether to receive that message The effectiveness of the pull model will also be limited by the amount of information sellers are willing to provide To market customized products, both sellers and buyers must communicate in a process of push-and-pull negotiation Page 573 12.8 Globalization and Cybernations While the virtual world will no longer have national boundaries, virtual communities and groups will abound Instead of political boundaries, the virtual world will be divided by interests and preferences In electronic commerce, globalization will afford sellers access to a larger market with regard to geographical area, but product differentiation and customization will mean a smaller market for each product Globalization is aided by the removal of tariffs and other regulatory measures based on geographical boundaries The global telecommunications accord and the information technology agreement pioneered by the World Trade Organization during the last years of the 20th century have opened up a truly international trade in computers, telecommunications equipment, and software A uniform commercial code and an income tax policy for international trade will further stimulate exchanges in digital products Most important, a fully convertible digital currency will facilitate international transactions As a result of these developments, a product's market will be defined not by geographical areas but solely by its customers Globalization, however, will not break down all market boundaries, as customers still have different tastes While spatial convergence will remove geographical market boundaries, virtual communities will act as distinct and coherent groups, just as physical markets and nations today These cybercommunities or cybernations will be made up of like-minded consumers and businesses, congregating and interacting online Sellers will want to know who participates in such virtual communities and how they interact In the virtual marketplace, consumers will learn about product quality from each other, while sellers will observe consumers' reactions to their products and marketing strategies What will the implications be of such learning by agents in a market? For one thing, unlike today's emphasis on strategic interactions between firms, the electronic marketplace will make apparent the Previous | Table of Contents | Next Products | Contact Us | About Us | Privacy | Ad Info | Home Use of this site is subject to certain Terms & Conditions, Copyright © 1996-2000 EarthWeb Inc All rights reserved Reproduction whole or in part in any form or medium without express written permission of EarthWeb is prohibited Read EarthWeb's privacy statement To access the contents, click the chapter and section titles Economics of Electronic Commerce Go! Keyword Brief Full Advanced Search Search Tips (Publisher: Macmillan Computer Publishing) Author(s): Soon-yong Choi; Andrew Whinston; Dale Stahl ISBN: 1578700140 Publication Date: 07/22/97 Search this book: Go! Previous | Table of Contents | Next Page 574 - need for firms to interact with consumers and for consumers to interact with other consumers and firms Specifically, consumers will not be myopic, but will become strategic players in the market Cybernations and cybercommun-ities will become powerful instruments in influencing prices, product quality, and competitive behaviors To counter this trend, firms will develop market strategies based on their interactions with consumers Indeed, demand preferences can be manipulated, quality information (advertising) can be controlled, and reputation or brand loyalty can be cultivated, all by actively participating in virtual communities Cybercommunities are a natural outgrowth of today's Internet societies, where the process of word-of-mouth dissemination of information is greatly facilitated by personal e-mail, mailing lists, chat lines, newsgroups, and other discussion forums, which can occur concurrently and reach every corner of the globe Although we mentioned earlier that sellers are not yet actively gathering and processing information from messages posted in UseNet newsgroups, some recognize the value of doing so Firefly (http://www.ffly.com) is an example of intelligent software agents observing, recording, and processing online data logged by users of various Firefly communities in an attempt to learn more about consumers Processed or mined data results are then offered to producers, who use Firefly communities as avenues for targeted advertising Software agents may even offer a review of a new product, using their knowledge about the preference of each community To succeed in this business venture, Firefly faithfully duplicates Internet communities For example, there are newsgroups and chat areas for movie buffs, country music fans, or cartoonists Such areas may be subdivided more finely by using a hierarchy of books, for example, and then fiction versus nonfiction, and so on It is also possible to form groups based on different characteristics, such as authors or writing style A list of an individual's membership, the intensity of participation, and such will provide a detailed preference profile of the person A bookseller may find such a market segment and post a review directly or through Firefly's software agent, acting like a member Page 575 of the group By observing the message exchange and downloading pattern and correlating this with sales and other data, the seller may modify the product, change its advertising strategy, or find another target group Knowing this, consumers may also engage in strategic behaviors to influence the seller's decisions The potential value of cybercommunities will be tempered by technical problems regarding the accuracy and usefulness of data gathered by software agents in cybercommunities The window of time over which data is used to calibrate the preference profile of each community is an important consideration in a rapidly changing environment such as the Internet Software agents need a substantial period of time to learn and match the preference of a group In a rapidly changing market, however, the learning speed of agents may be too slow to be helpful The group may change its composition and membership, or the group as a whole may undergo a shift in preferences Such dynamic changes can perhaps be eliminated by requiring strict guidelines for join a group, but if there is such a guideline in the first place, there will be no need to "learn" about the consumers On the other hand, too short a window of observation may yield very unreliable estimates about the preferences Despite these potential issues, marketing differentiated and customized products will depend on information gathered in cybercommunities Mass market products are well suited for mass media advertising On the other hand, niche market products often are too costly to advertise on such a scale, although the initial lack of people's knowing about and trying out the product will be detrimental to future sales (McFadden and Train, 1996) For niche products and experience goods consumers are wary of trying, a discussion group composed of people with similar tastes could become a major source of product information If someone tries out a new product and posts an opinion of its quality, all other members will value the information, because they share the same tastes And as we have seen earlier, the seller, as a business member or acting as a consumer, may offer a review to influence opinion or promote the product in an effort to induce some consumers to try it out Page 576 12.9 Market-Clearing Mechanisms An efficient market leaves no excess supply or demand In reality, most markets fail to match supply with demand at least temporarily, leaving some sellers with excess inventories and some buyers without desired products or services One reason for this is the geographical distance that prevents the simultaneous participation of all sellers and buyers Another reason may be the lack of information or the failure for a market to be coordinated Still other reasons that prevent efficient market clearing include high transaction costs, and the bounded rationality of the agents—that is, sellers or buyers are not capable of transacting in the most efficient way A virtual market offers some reprieve to many of these sources of market inefficiency An electronic market not only offers a cheaper, more cost-effective way to transact business, but also brings about a more efficient market-clearing mechanism, because it is not limited by spatial constraints or inefficiencies in conducting transactions A typical electronic market consists of buyers and sellers, a commodity or commodities, and a price-discovering mechanism, such as a simultaneous ascending price auction or a sealed bid auction An electronic market—unlike such physical auction houses as the New York Stock Exchange—removes the physical barrier for transactions The long-run significance of an electronic market, however, will be its capability to create an efficient decentralized market, where the price-setting mechanism closely resembles the idealized process of tatonnement—a gradual or step-by-step market correction to match supply and demand—but in a fast automated fashion Already, pioneering electronic markets have been developed on the Internet, where such an enterprise duplicates many actions of a physical market It offers a meeting place for buyers and sellers, a negotiation procedure, products, auxiliary services such as quality verification and payment clearing, and—sometimes—delivery service Computers and electronic games are auctioned off on the Internet Aucnet (http://www.aucnet.com) offers a clearing market among used-car dealers Stock exchanges maintain online trading services for brokers Governments auction off treasury bills electronically, and Previous | Table of Contents | Next Products | Contact Us | About Us | Privacy | Ad Info | Home 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Previous | Table of Contents | Next Page 577 - web advertising spaces are auctioned off to the highest bidders in real-time Other interesting examples of clearing markets are given by McAfee and McMillan (1997) Future electronic markets will be more than a simple use of technologies, whose impact is often in terms of cost savings In some cases, an electronic market may open a new opportunity to trade a product that may not have been possible otherwise In other words, an electronic stock exchange is more than an automated version of the New York Stock Exchange As McAfee and McMillan (1997) illustrate, an electronic market can effectively replace a regulated market with a decentralized market The result is often increased efficiency while avoiding many problems associated with bureaucratic administration and the lack of incentives Regulation is often motivated because of the failure of the market to allocate resources Nevertheless, in many cases, electronic markets succeed in overcoming the coordination problems observed in physical markets The railway industry, to give an example, is often a natural monopoly and is regulated as such In such a market, one firm will be more efficient and thus able to provide the service at the lowest possible cost, while two or more competing firms may not survive In Sweden, however, the central rail administration, who allocated the use of tracks centrally, was instructed to sell private firms access to these tracks Opponents argued that, given the complexity of train routes and timing schedules, such a decentralized market allocation was impossible, not to mention a threat to train safety Brewer and Plott (1995), through simulated experiments, demonstrated that not only was such a decentralized allocation possible but the result would be increased efficiency The experiments consisted of several sessions of electronic bidding, where bidders did not know competitors' valuations of tracks Nevertheless, the analysis of the results showed that actual bid winners—the final allocation of tracks—corresponded to the most desirable theoretical distribution In this example, an electronic market was shown to be more than an automated physical market, as the former was able to achieve what the latter failed to In this sense, an electronic market is not just an application of new technology to existing markets—it is a new type of market Page 578 Through electronic commerce, then, many goods will be allocated more efficiently, especially those regulated products and services now being targeted for deregulation The trend toward deregulation is spurred by the belief that deregulated industries will result in better product choices, lower prices, and higher consumer welfare, but it is often unclear how these industries, which have been considered to be natural monopolies in which competition harms consumers, can be made competitive when resources are allocated efficiently The answer will lie in virtual electronic markets by which a complex problem of resource allocation and price discovery processes can be coordinated As discussed in Chapter 11, "Business and Policy Implications of Electronic Commerce," the web is already used to coordinate interstate electricity wholesale and retail wheeling In the virtual economy, different types of market-clearing mechanisms may be offered at the same time for the same product Selling by posted prices may be more efficient than bid-based auctions if both sellers and buyers are fairly familiar with each other's values, that is, consumers' willingness to pay and the cost of production On the other hand, auctions may be more efficient if there are many market agents and the supply and demand are somewhat uncertain Market brokers may operate these mechanisms and compete through market experimentation and efficiency 12.10 Summary This chapter looked at a broader picture of the future virtual economy—electronic commerce as a market with its unique market agents, products, and processes Popular articles and movies on the subject of virtual reality conjure up a future where the physical world ceases to be important or is in a power struggle with the virtual world A truly virtual world that can compete with the physical world only exists in a science fiction series such as Star Trek, where Page 579 holodecks create real-life characters and an environment with which humans can interact Even with their 24th century technologies, however, holodeck characters sometimes go awry—it was they, after all, who attempted to take over the ship itself in one episode Luckily, the virtual world in the year 2015 will not be anything close to that vision The virtual world pictured here parallels our physical world in many respects The most important change it will bring lies in the way we will interact with each other and with products—in other words, virtual processes Technological developments in the next 20 years will be substantial, but the seeds of the virtual world—virtual players, products, and processes—are already here The virtual world that knows no physical boundaries turns out to be cybercommunities and cybernations While these interest groups exist only virtually, in one sense they are an extension of today's segmented markets The difference, of course, is that these groups will have the means and reasons to be more coherent and will become a force to reckon with in the marketplace and in politics as well A hidden agenda in highlighting the features of the future world is to suggest some areas of interest for economic research As a commodity market, the virtual marketplace presents fertile ground for research in all areas of economic theory Aside from Internet economics (which deals with resource allocation and pricing for information infrastructure), cost structure and pricing models for information products have already interested many economists More rigorous research is needed in digital products, product differentiation and customization, electronic search and advertising, copyrights, and digital currency This chapter also emphasized the role of producer and consumer learning and the importance of consumer groups and actions, which is often neglected in firm-oriented theory of industrial organization It is to be hoped that the virtual economy described here will guide both researchers and businesses in evaluating developments in electronic commerce in an appropriate and useful context Page 580 References Brewer, P J and C R Plott "A binary conflict ascending price (BICAP) mechanism for the decentralized allocation of the right to use railroad tracks." Social Science Working Paper, #887, California Institute of Technology, 1995 Hämäläinen, M., A B Whinston and S Vishik "Electronic markets for learning: Education Brokerage on the Internet." Communications of the ACM, 39(6) 1996: 51_58 Maes, P "Agents that reduce work and information overload." Communications of the ACM, 37(7) 1994: 31_40 McFadden, D L and K E Train "Consumers' evaluation of new products: learning from self and others." Journal of Political Economy, 104(4) 1996: 683_703 McAfee, R P and J McMillan "Electronic markets." Readings in Electronic Commerce Ed R Kalakota and A B Whinston Reading, Mass.: Addison-Wesley, 1997 293_309 Tapscott, D The Digital Economy: Promise and Peril in the Age of Networked Intelligence New York: McGraw-Hill 1996 Zaltman, G "Metaphorically speaking." Marketing Research, 8(2) 1996: 13_20 Previous | Table of Contents | Next Products | Contact Us | About Us | Privacy | Ad Info | Home Use of this site is subject to certain Terms & Conditions, Copyright © 1996-2000 EarthWeb Inc All rights reserved Reproduction whole or in part in any form or medium without express written permission of EarthWeb is prohibited Read EarthWeb's privacy statement To access the contents, click the chapter and section titles Economics of Electronic Commerce Go! Keyword Brief Full Advanced Search Search Tips (Publisher: Macmillan Computer Publishing) Author(s): Soon-yong Choi; Andrew Whinston; Dale Stahl ISBN: 1578700140 Publication Date: 07/22/97 Search this book: Go! Previous | Table of Contents | Page 581 - Internet Resources Smart Products For home automation projects, see Electronic House Online at: http://www.electronichouse.com For appliance computerization, see 21st Century Boiler Controls at: http://www.facilitiesnet.com/NS/NS3mk5b.htm Habitat and Virtual Communities Douglas Crockford's Habitat Page at: http://www.communities.com/people/crock/habitat.html WorldsAway at: http://www.worldsaway.com The 21st Century Technologies Assorted articles and web sites that discuss the future in selected subjects include: ● Education: Vision 2010 at http://www.si.umich.edu/V2010/ ● American embassy and the 21st century information technology: http://www.info.usaid.gov/faiig/wgrecs4.txt ● Workers and workplace: http://www.saigon.com/~vacets/articles/dungh1.html Page 582 ● GIS: http://www.gatekeeper.com/stormwater/information/gis_full.html ● Medicine and healthcare: http://cfm.mc.duke.edu/chair/pcc/public/ahc/player.htm ● Court technology: http://www.ncsc.dni.us/ncsc/bulletin/future/future.htm ● Banking: http://www.grantthornton.com/gtonline/finance/currency /fall96c.htm Global economy: http://www.cgtd.com/global/gat-prs.html ● Previous | Table of Contents | Products | Contact Us | About Us | Privacy | Ad Info | Home Use of this site is subject to certain Terms & Conditions, Copyright © 1996-2000 EarthWeb Inc All rights reserved Reproduction whole or in part in any form or medium without express written permission of EarthWeb is prohibited Read EarthWeb's privacy statement ... Integration and Retail Wheeling 525 11.10 The Economics of Electronic Commerce and the Internet 528 The Economics of Electronic Commerce 529 The Economics of Information Infrastructure 531 11.11 Summary... impact of the new business medium by defining electronic commerce and the nature of digital products Opinions regarding the future of the Internet and electronic commerce may vary widely, but the. .. platforms and supports the exchange of human-readable messages Because of this, the potential of electronic commerce over the Internet far surpasses that of EDI or private VANs The use of EDI was projected