Who Stands to Lose From Businesses Moving Online?
eProfits Made Simple believes that companies most directly threatened by eCommerce include travel agencies, entertainment ticket operations, mail-order catalogs, and retail stores--particularly software stores. eCommerce is already successfully invading their territories.
A recent Forrester Research report predicts that sales of entertainment and travel tickets on the Internet will climb from $475 million in 1997 to more than $10 billion by the year 2001. Forrester says that figure represents 8 percent of all travel tickets. As Bill Gates puts it, eCommerce is about to eliminate the middleman. The buzzword of the day is disintermediation, a way of saying that anyone between the seller and the buyer is in big trouble. But a closer look reveals that eCommerce may be creating of a new kind of middleman. Some of the most talked-about eCommerce success stories, such as Amazon.com and Virtual Vineyards, are really a new kind of intermediary. Amazon.com doesn't publish books, after all, and Virtual Vineyards doesn't make wine. They are simply online distributors. But these e-middlemen must demonstrate that they add value to the buying process, through marketing, customer service, or some other method. If they don't, customers will vote with their modems and cut them out of the loop.

What Is the Future of eCommerce?

eProfits Made Simple believes that the eCommerce is: there is a bright future for eCommerce. Once the details of online commerce are worked out, it and the Internet in general could reshape the structure of the business world. The huge growth of virtual communities--people getting together in ad hoc interest groups online - promises to shift the balance of economic power from the manufacturer to the consumer. At least, that's the view of John Hagel and Arthur Armstrong, a pair of analysts at McKinsey & Company, an international management consulting firm. These virtual communities are already making their presence felt. Investment site Motley Fool lets members exchange investment advice without the benefit of a stockbroker. ParentsPlace is a meeting ground for parents that gives smaller vendors an avenue to reach potential customers for products such as baby food and shampoo. Virtual communities erode the marketing and sales advantages of large companies. A small company with a better product and better customer service can use these communities to challenge larger competitors--something it probably couldn't do in the real world. In Net Gain: Expanding Markets Through Virtual Communities, published by Harvard Business School Press, Hagel and Armstrong argue that rather than fight the trend, smart companies will help build such communities and use them to reach customers.

What’s the difference between physical stores and Web stores?
Web storefronts integrate various functions such as physical presence as a store, sales representatives, ordering and payment functions (combined cash register, credit card reader, etc.), back office supports and various data interchanges (for inventorying, supply ordering, etc.)

What is the electronic marketplace?

eProfits Made Simple believes electronic markets ordinarily refer to online trading and auction, for example, online stock trading markets, online auction for computers and other goods. The electronic marketplace refers to the emerging market economy where producers, intermediaries and consumers interact electronically or digitally in some way. The electronic marketplace is a virtual representative of physical markets. The economic activities undertaken by this electronic marketplace collectively represent the digital economy. Electronic commerce, broadly defined, is concerned with the electronic marketplace. The electronic marketplace resembles physical markets (the one we know) in many aspects. As in physical markets, components of the digital economy include: players (market agents such as firms, suppliers, brokers, shops and consumers) products (goods and services;) and processes (supply, production, marketing, competition, distribution, consumption, etc.). The difference is that, in the electronic marketplace, at least some of these components are electronic, digital, virtual or online (whichever term you may prefer). For example, a digital player is someone with an email or a Web page. Purely "physical" sellers may be selling a digital product, e.g. digital CD-ROM. One that sells physical products at a physical store may offer product information online (thereby allowing consumers to "search online"), while production, ordering, payment and delivery are done conventionally. Currently, the emphasis is on the core of the electronic marketplace where everything (i.e. all value chains or business activities) is online. But, if any aspect of your business or consumption dwells upon the digital process, you are already part of the electronic marketplace. That is, almost all of us are already players in the electronic marketplace!
How is the electronic marketplace different from physical markets?
Answer: The answers to this question provide us with a preview to what we try to achieve in this FAQ: comparing the digital economy with the physical economy, and coming up with a better understanding of the new market. Business strategies must be based on a sound understanding of the market dynamics, for which we rely on standard economics. More in-depth discussion is presented in our book, "The Economics of Electronic Commerce". Is the electronic marketplace a perfect, frictionless market? Will transaction costs become zero? Will the market be perfectly competitive, yielding lowest possible prices? Should the market be left alone to march toward those predictions? On the surface, the electronic marketplace appears to be something of a perfect market, where there are numerous, worldwide sellers and buyers, who in turn have bountiful information about the market and products, and where no intermediaries are necessary. Such a market is very competitive and efficient (with no need to regulate or intervene arbitrarily). However, closer looks indicate that consumer searches are not very efficient (due to the cost of having a complete, easily searchable database, and because sellers may not provide all information necessary). Although wholesalers and retail outlets may not be needed, other types of intermediaries appear to be essential for the electronic market to function adequately (e.g. certification authorities, electronic malls who guarantee product quality, mediators for bargaining and conflict resolution, etc.). All these brokers add transaction costs. Will prices be lower? Digital products are highly customizable due to its transmutability, i.e. easy to revise, reorganize and edit. With information about consumer tastes, products will be differentiated (or customized, e.g. custom news). The number of potential sellers may be low, or even only one, in a highly differentiated and segmented market, and the price will tend to approach the maximum price the buyer is willing to pay. (In economic terms, sellers practice first degree or perfect price discrimination, which is exact opposite to the result we get in a perfectly competitive market.) How about the often heard zero marginal cost argument that digital products will be priced at zero (given out free) because their reproduction costs will be minimal? The price will approach zero only if (1) the marginal cost is really approaching zero and (2) there is effective competition among sellers. We will discuss the microeconomics of digital products in Section D1 in detail. In short, the marginal cost of a digital product may be substantial. Even when it is close to zero, prices in a non-competitive market will be determined more by demand (or the buyer's willingness to pay) than by marginal cost. Unless we think all information and digital products are of no value, they will never be priced at zero by sellers with market power. (Giving out free products today does not mean that sellers are doing it because the costs are zero nor that they will continue to do so when they monopolize the market.)