ELECTRONIC COMMERCE:INTERMEDIARIES AND MARKETS

INTERMEDIARIES AND MARKETS

The term digital economy makes it clear that digital technologies are more than tools that offer an alternative to conventional catalog, TV, and mall shopping activities. Digital technologies provide incentives to reorganize firms, reconfigure products and marketing strategies, and explore novel ways to make transactions. In this section, we review new forms of market mechanisms that are based on networked markets.

Types of Intermediation

Economic activities revolve around markets where sellers, buyers, and other agents must meet and interact. Therefore, the structure of the electronic marketplace plays an important role in achieving ultimate economic efficiency. How the marketplace is organized is a question that deals with the problem of matching sellers with buyers in the most efficient manner, providing complete and reliable product and vendor information and facilitating transactions at the lowest possible cost.

The three models—portals, cybermediaries, and auction markets—represent different solutions to tackling these problems:

• Portals: In portals, the objective is to maximize the number of visitors and to present content in a controlled environment, as in physical malls. Internet portals generate revenues from ad- vertising or from payments by firms whose hypertext links are strategically placed on the portal’s web page. Corporate portals, an extended form of intranet, do not produce advertising revenues but offer employees and customers an organized focal point for their business with the firm.

• Cybermediaries: Cybermediaries focus on managing traffic and providing accounting and pay- ment services in the increasingly complex Web environment. Their revenues depend on actual sales, although the number of visitors remains an important variable. Many of them provide tertiary functions that sellers and buyers do not always carry out, such as quality guarantees, marketing, recommendation, negotiation, and other services.

• Electronic auctions: Electronic auction markets are organized for face-to-face transactions be- tween sellers and buyers. The market maker, although it is a form of intermediary service, plays a limited role in negotiation and transaction between agents. Conceptually, electronic markets are a throwback to medieval markets where most buyers and sellers knew about each other’s character and their goods and services. This familiarity is provided by the market maker through information, quality assessment, or guarantee. In this market, negotiations for terms of sales become the most important aspect of trade.

We find that the reason why more intermediaries are needed in electronic commerce is that the complex web of suppliers and customers—and real-time interactions with them—poses a serious challenge to fulfilling transactional requirements. Business relationships in physical markets are often hierarchical, organized along the value chain, and dominated by static arrangements in long-term contracts. Retailers typically rely on distributors and manufacturers, who in turn prefer to maintain steady and reliable relationships with suppliers. In the networked economy, however, the number of potential business partners virtually equals that of all firms and consumers. More importantly, their relationships, with no hierarchical structure, change dynamically. A simple business process such as a payment settlement between a seller and a buyer often involves several agents. For these reasons, matching sellers with buyers requires more than an advertiser-supported portal and a hypertext link. To support interactive purchases on the Internet, the electronic marketplace requires more innovative mechanisms, which we review below.

Managing Distributed Commerce

The simple act of buying an online news article may involve numerous agents who provide search information, local and out-of-state newspaper publishers who have contractual obligations, reporters and columnists (who actually produce contents), payment service providers, banks, copyright clearing houses and so on. If Yahoo or Microsoft owned most Internet firms (publishers, payment services, search sites, etc.), a customer could possibly buy (or sell) products on the company’s website and necessary transactions and payments could be handled by one firm. A retailer in a physical market provides a similar service. In a grocery store, the customer collects all necessary items and makes one payment to the owner.

To enable such a convenient buying experience, a Web store must carry all items that customers need. Otherwise a list of items in a shopping basket may come from a number of different vendors, the customer having collected the items after visiting the vendors’ individual websites. Options left to stores and buyers are to:

• Process multiple transactions separately

• Choose one seller, who then arranges payment clearance among the many sellers

• Use an intermediary

In a distributed commerce model, multiple customers deal with multiple sellers. An efficient market will allow a buyer to pay for these products in one lump sum. Such an arrangement is natural if a website happens to carry all those items. Otherwise, this distributed commerce requires an equally flexible and manageable mechanism to provide buyers the convenience of paying once, settling amounts due among various vendors. The intermediary Clickshare relies on a framework for distrib- uted user management.

For example, the Clickshare (http: / / www.clickshare.com) model (see Figure 4) gives certain con- trol to member sites that operate independently while Clickshare, as the behind-the-scenes agent, takes care of accounting and billing. Going beyond payment settlement, an intermediary or ‘‘cyber- mediary’’ not only provides member firms with accounting and billing functions but also undertakes joint marketing and advertising campaigns and exercises some control over product selection and positioning. In this regard, a cybermediary resembles a retailer or a giant discount store. It differs from an online shopping mall, which offers location and links but little else. Unlike a portal, which is inclined to own component services, this intermediation model allows members to maintain and operate independent businesses—thus it is a distributed commerce—while at the same time trying to solve management issues by utilizing an intermediary.

Amazon.com is a well-known intermediary for publishing firms. As Amazon.com expands its product offerings, it has become an intermediary or a distributor / retailer for other products and services as well. A vertical portal such as Amazon.com or a corporate portal such as Dell is well positioned to expand horizontally and become a cybermediary dealing with their own as well as others’ businesses.

It must be pointed out that Yahoo, a portal, may expand in the same way. However, portals focus on either owning a share of other businesses or arranging advertising fees for the referrals. In contrast, a cybermediary’s main function is to manage commercial transactions of individuals in the distributed environment in addition to providing users with a convenient shopping location.

Association and Alliance

Conventional web portals such as Yahoo and Excite try to maximize advertising revenues by increas- ing the number of visitors to their sites and enticing them to stay longer to view advertisements. But advertisements as a form of marketing pose the age-old question, do the viewers really buy advertised

products? To ensure that the message presented on visitors’ web pages is producing an effect, some advertisers require click-through responses from viewers. Instead of relying on passive imprints, click- through advertisements are paid only if the viewer clicks on the ad and connects to the advertiser’s website. Like hypertext links referring customers to other sites, these click-through ads are aimed at managing visitor traffic. In this way, portals become a customer referral service.

The possibility to refer and manage traffic on the Web is fully realized at Web ventures specifically designed to generate revenues from referrals. For example, Amazon.com has over 100,000 associates on the World Wide Web, who maintain their own websites where visitors may click on hypertext links that directly transport them to the Amazon.com site. Associates—that is, intermediaries—in return receive referral fees based on actual purchase by those referred by their sites. Through the Associates Program, Amazon.com has effectively opened more than 100,000 retail outlets in a couple of years. Referral fees paid to associates have replaced advertising expenses and the costs to open and manage retail stores.

Referral fees can be shared by consumers as well. SmartFrog,* for example, functions as a referrer to various online shops such as Amazon.com and eToys. After becoming a member, a Smart Frog customer visits vendor sites and, when he or she is ready to buy, goes to Smart Frog’s website and clicks on the listed vendors, who pay 10% of the purchase price to Smart Frog. Out of this 10%, Smart Frog currently rebates half to its customers and keeps the remaining half.

In this way, Smart Frog, not the vendors, pays for the advertising and marketing efforts needed to generate visitors. In this cybermediated economy, the costs to advertise and attract customers are paid to entrepreneurs and consumers instead of marketing firms and the media who carry advertise- ments. The intermediary’s profit and the benefit for consumers—in the form of lowered prices—both originate from the transaction costs previously marked for advertising and marketing. This new busi- ness opportunity and enterprise model is enabled by the distinctive nature of the networked economy.