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Module: Competing in the Network Economy

TOPIC 2: E-marketplaces: Economics, Competition and Competitive Advantage Strategies

2.1 E-marketplaces and their components.2.2 Types of E-marketplaces and their features.2.3 Intermediaries in EC and their roles.2.4 Electronic catalogs and other market mechanisms2.5 Auctions, bartering and negotiating online.2.6 EC in the Wireless Environment: M-Commerce 2.7 Liquidity, quality and success factors in e-marketplaces2.8 The economic impact of EC.2.9 Competition and strategies in the digital economy2.10 Impact of E-markets on business and organisations.

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2.1: Marketplaces

• Markets (electronic or otherwise) have three main functions: – Matching buyers and sellers– Facilitating the exchange of information, goods, services,

and payments associated with market transactions– Providing an institutional infrastructure, such as a legal

and regulatory framework, that enables the efficient functioning of the market

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• Electronic marketplaces (e-marketplaces or marketspaces), changed several of the processes used in trading and supply chains– Greater information richness – Lower information search costs for buyers– Diminished information asymmetry between sellers and

buyers– Greater temporal separation between time of purchase

and time of possession – Greater temporal proximity between time of purchase

and time of possession – Ability of buyers and sellers to be in different locations

2.1: Electronic Marketplaces

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• Marketspace– A marketspace is an electronic marketplace in

which sellers and buyers exchange goods and services for money (or for other goods and services).

– While traditional marketplaces are constrained by their physical locations, marketspaces use technology to eliminate this constraint (by being online)

2.1: Marketspace

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• Customers (most important)• Sellers• Products and services,

including– digital products: goods

that can be transformed into digital format and delivered over the Internet, e.g., e-books, software, graphics, video clips, etc.

• Infrastructure• Other business partners

• Front end– e-seller’s business processes

through which customers interact, eg. seller’s portal & e-catalogs

• Back end– activities that support online

order-taking• Intermediaries

– Third party that operates between sellers & buyers

• Support services

2.1: Marketspace Components

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• Electronic storefront: – A single company’s Web site

where products and services are sold.

• Most common mechanisms necessary for conducting the sale:– electronic catalog– search engine – electronic cart– e-auction facilities– payment gateway

2.2: Storefronts

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• Online Mall (e-mall)– An online shopping center where many stores

are located• Types of Stores and Malls

– General stores/malls– Specialised stores/malls– Regional or global stores– Pure online stores or click-and-mortar stores

2.2: Storefronts

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• e-marketplace: – An online market, usually B2B, in which buyers and

sellers exchange goods or services; the three types of e-marketplaces are private, public, and consortia

• Private e-marketplaces: – Online markets owned by a single company; can be

either sell-side or buy-side e-marketplaces• Sell-side e-marketplace:

– A e-marketplace in which a company sells either standard or customised products to qualified companies

2.2: Types of E-Marketplaces

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• Buy-side e-marketplace: – A e-marketplace in which a company makes

purchases from invited suppliers• Public e-marketplaces:

– B2B marketplaces, usually owned and/or managed by independent third parties, that include many sellers and many buyers; also known as exchanges

• Consortia: – E-marketplaces owned by a small group of large

vendors, usually in a single industry

2.2: Types of E-Marketplaces

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2.2: Information Portals

• Information Portal: – A single, personalised online point of access (through a

Web browser) to business information inside an organisation.

• Six Types of Portals– Commercial (public) portals - most popular and diverse– Corporate portals– Publishing portals– Personal portals– Mobile portals: a portal accessible via a mobile device– Voice portals: a portal accessed by telephone or cell phone.

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• Intermediaries (brokers) provide value-added activities and services to buyers and sellers, such as wholesalers and retailers

• Infomediaries:– Electronic intermediaries that control information flow in

cyberspace, often aggregating information and selling it to others

• Roles and value of intermediaries in e-markets– Reduce search costs– Increase or create privacy– Provide more complete information– Reduce contract risk– Reduce pricing inefficiencies

2.3: Intermediation in E-Commerce

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• e-distributor:– An e-commerce intermediary that connects

manufacturers (suppliers) with buyers by aggregating the catalogs of many suppliers in a single location - the intermediary’s Web site

• Disintermediation:– Elimination of intermediaries between sellers and buyers

• Reintermediation:– Establishment of new intermediary roles for traditional

intermediaries that were disintermediated

2.3: Intermediation in E-Commerce

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Case Study: Diamonds Forever—Online

• The age-old business of gem buying is very inefficient: – Several layers of intermediaries can jack up the price of

a gem 1,000% between wholesale and final retail prices.• American Don Kogen made his fortune in Chanthaburi

(Thailand) - one of the world’s leading centers for processing gems

• He started by purchasing low-grade gems from sellers that arrived early in the morning and then selling them for a small profit to dealers who arrived late in the day

• This quick turnover of inventory helped him build up his capital resources

• He reached the U.S. gem market using advertising.

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• Using faxes, he shortened the order time• In 1998, Kogen decided to use the Internet -

establishing thaigem.com and sold his first gem online• By 2001, the revenue from his online business reached

$4.3 million, and it more than doubled (to $9.8 million) in 2002

• Online sales account for 85 percent of the revenue• The buyers are mostly dealers or retailers such as Wal-

Mart or QVC

Case Study: Diamonds Forever—Online

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• He buys raw or refined gems from all over the world, some online, catering to the demand of his customers

• Thaigem’s competitive edge is low prices• The proximity to gem processing factories and the low

labour cost enable prices significantly lower than his online competitors.

• Unsatisfied customers can return merchandise within 30 days, no questions asked

• Delivery to any place in the world is made via Federal Express, at about $15 per shipment.

Case Study: Diamonds Forever—Online

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2.4: Electronic Catalogs• Electronic catalogs:

– The presentation of product information in an electronic form; the backbone of most e-selling sites.

– They consist of a product database, a directory with search capabilities, and a presentation function.

• Electronic catalogs can be classified by the following dimensions:– The dynamics of the information presentation– The degree of customisation– Integration with business processes

• Customised catalogs– A catalog assembled specifically for a company, usually a

customer of the catalog owner

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• Search engine– A computer program that can access a database of Internet

resources, search for specific information or keywords, and report the results

• Software (intelligent) agent:– Software that can perform routine tasks that require

intelligence • Electronic shopping cart:

– An order-processing technology that allows customers to accumulate items they wish to buy while they continue to shop

2.4: E-Catalogs, Search Engines & Shopping Carts

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Case Study: Electronic Catalogs at Boise Cascade• Boise Cascade Office Products

– $4-billion office products wholesaler customer base includes over 100,000 large corporate customers and 1 million small ones

– 900-page paper catalog used to be mailed to customers once each year

– Boise also sent mini-catalogs tailored to customers’ individual needs based on past buying habits and purchase patterns

• In 1996, the company placed its catalogs online– Customers view the catalog at boiseoffice.com and can order

straight from the site or submit orders by e-mail– The orders are shipped the next day– Customers are then billed

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• In 1997, the company generated 20 percent of its sales through the Web site

• Now the process of producing a Web catalog that is searchable, rich in content, and available in a variety of formats takes only 1 week

• One major advantage of customised catalogs is pricing• Boise estimates that electronic orders cost

approximately 55 percent less to process than paper-based orders

Case Study: Electronic Catalogs at Boise Cascade

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2.5: Auctions

• Auction:– A market mechanism by which a seller places an offer to sell

a product and buyers made bids sequentially and competitively until a final price is reached.

• Auctions can be done:– online – off-line – at public sites (eBay)– at private sites (by invitation)

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2.5: Auctions

• Electronic auction (e-auction):– Traditional auctions are limited by the short duration of the

auction itself and the physical location of the auction. – Electronic auctions (conducted online) can occur over greater

time periods and are not limited by location since they take place in electronic marketspaces.

• Dynamic pricing– Prices that change based on supply and demand relationships

at any given time– Dynamic pricing has the advantage of being constantly

updated and moving towards the true market price. – The disadvantages: its constant variability and possibility that

the market price is below the sellers expected price.

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2.5: Auctions

• Types of auctions:– One buyer-one seller– On seller-many buyers

• Forward auctions used for fast liquidation and as a selling channel. Price is increasing; the highest bidder wins. (Forward auction: An auction in which a seller entertains bids from buyers).

– One buyer-many potential sellers • Reverse auction (bidding or tendering system) in which

the buyer places an item for bid (tender) on a request for quote (RFQ) system, potential suppliers bid, with price reducing sequentially, and the lowest bid wins; primarily a B2B or G2B mechanism

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2.5: Auctions

• Types of auctions (cont’d):– One buyer-many sellers (special mode)

• “name-your-own-price” model: – An auction model in which a would-be buyer specifies the

price (and other terms) they are willing to pay to any willing and able seller.

– It is a C2B model, pioneered by Priceline.com

– Many buyers-many sellers• Double auction:

– Auctions in which multiple buyers and their bidding prices are matched with multiple sellers and their asking prices, considering the quantities on both sides.

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2.5: Auctions: Benefits to Buyers, Sellers & Auctioneers

• Auctions provide several advantages to buyers because they allow them to purchase goods from a wide variety of sellers without the constraint of time or place.

• The wide variety of different auctions styles meets the needs of a wide variety of different purchasers.

• Auctions benefit sellers by allowing them to sell to a huge potential marketplace not constrained by time or place. – Additionally, it allows them to sell goods that may only have a very small

target market. – Sellers are able to sell their goods at the prevailing global market price.

• Auctioneers benefit from auctions because it provides a business model that allows their firms to stay in business. – They are able to benefit from usage by both buyers and sellers.

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2.5: Auctions: Limitations and Impacts

• Limitations of e-auctions– Lack of security– Possibility of fraud– Limited participation

• Impacts of auctions– Auctions as a coordination mechanism– Auctions as a highly visible distribution mechanism.– Auctions as a component in e-commerce – By bringing together many potential buyers in a given

location, online auctions provide the liquidity necessary to create a marketplace for unique items.