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ELC 498 DAY 3 Creating value: Economics of Internet-based Commerce ELC 498 DAY 3 Creating value: Economics of Internet-based Commerce

Agenda l Questions? ? l Blackboard l 2 nd l Perspective Creating Value: Economics Agenda l Questions? ? l Blackboard l 2 nd l Perspective Creating Value: Economics Of Internetbased Commerce

4 Perspectives Technological Drivers Of Change 2. Creating Value: Economics Of Internet-based Commerce 3. 4 Perspectives Technological Drivers Of Change 2. Creating Value: Economics Of Internet-based Commerce 3. Capturing Value: Market Structure And Competition 4. Creating And Capturing Value In The Supply Chain 1.

Impact of technology l Attributes of Information technology (especially the Internet) create consumer value Impact of technology l Attributes of Information technology (especially the Internet) create consumer value l l Value of product or service to consumer is greater that the cost of production 3 impact areas l l l Enhancing value to consumer Reductions of costs Improving the match between what is wanted and what is offered (search cost)

Value to consumer l Improving products & services l New products & services l Value to consumer l Improving products & services l New products & services l More information about existing products and services Better buying decisions l Greater enjoyment of purchase l

Reduction of Costs l Manufacture more efficiently l Reduce distribution costs l Easier to Reduction of Costs l Manufacture more efficiently l Reduce distribution costs l Easier to do

Improve the match (reduce search cost) l Traditional supply and demand economics ignore serveral Improve the match (reduce search cost) l Traditional supply and demand economics ignore serveral costs l l l Assumes buyers know loss cost providers Assumes sellers know buyer demand Assumes both know how to find each other Ignores cost of transactions Reality l Hard to predict l l l who wants what Where do they want it When will they want Imperfect information creates consumer cost Uncertainty increases risk which increases cost

Creating consumer value l Several different ways l Better product information l l Personalization Creating consumer value l Several different ways l Better product information l l Personalization l l Easier for digital products Convenience l l l Selective or adaptive Customization l l Big gains form Internet 24/7 Automation Complementary Services l l l Upgrades Ancillaries Sales assistance

Reduce distribution costs l Digital l products the channel is the medium l Home Reduce distribution costs l Digital l products the channel is the medium l Home delivery vs. “go get it” Reduced handling for retailers l No shrinkage l No rent l No sales clerk l No sales tax (sometimes) l Use dead time (overnight, weekends) l

Reduce transactions cost Increase market efficiency by eliminating “friction” l Transactions steps (possible costs) Reduce transactions cost Increase market efficiency by eliminating “friction” l Transactions steps (possible costs) l l l l Buyers decided what they want Sellers find buyers Buyers identify lost cost suppliers Buyers must qualify suppliers Both Buyer and seller must invest in processes Mechanics of transaction Routines and Polices for after sales service and support

Reduce Transactions Costs l Increase l product awareness Promotions and marketing l Matching buyer Reduce Transactions Costs l Increase l product awareness Promotions and marketing l Matching buyer to seller Intermediaries and Markets l Virtual search versus Physical search l Eliminations of unlikely (or unsavory) contra parties l

Reduce Transactions costs l Authenticating and “qualifying” buyers and sellers l Synchronous Spot (cash) Reduce Transactions costs l Authenticating and “qualifying” buyers and sellers l Synchronous Spot (cash) markets are less of a problem l l Online risks are high due to delay l l l contract performance Credit cards provide some mitigation for consumers Certifiers (Gomez and BB) EBay's rating system Build Brand! Compare Costs

Reduce transactions Cost l Making Investments to facilitate trade l B 2 B is Reduce transactions Cost l Making Investments to facilitate trade l B 2 B is often idiosyncratic (can lead to ex post exploitation ) l Coal power plant near coal mine but under different ownership l l l Long term contract Vertical integration Mechanics of purchasing l l Asynchronous vs synchronous communication in B 2 C B 2 B electronic vs paper transaction l l Automated purchase order reconciliation Inventory management

Reduce transactions costs l After sales service and support l l l Returns (online Reduce transactions costs l After sales service and support l l l Returns (online vs offline) Comlaint handling Implications and Firm Scope l l l Reduction of transactions cost will increase scope (costs create boundaries) In house vs. outsource decisions Supply chain coordination by vertical architects Reduction of switching costs (less situational reliance) Reductions in both interfirm and intrafrim transaction costs

Creating value by reducing Compromise l l Reducing uncertainty (risk) Consumer cannot find what Creating value by reducing Compromise l l Reducing uncertainty (risk) Consumer cannot find what they wants and settles for what they can find l l Economies from centralization of merchandise l l Can’t find in Fort Kent but is available in Bangor Disparate inventory levels based on locations Hybrid models RFIDs ? ? Make then sell or sell then make? ? l l Pull manufacturing Kaizen