ELECTRONIC COMMERCE:OUTLOOK AND CHALLENGES

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OUTLOOK AND CHALLENGES

New technologies and applications are continually developed and applied to business processes on the Internet. The basic infrastructure of the digital economy clearly consists of computers and net- working technologies. However, underlying component technologies and applications are evolving rapidly, allowing us to make only a haphazard guess as to which will turn out to be most critical or most widely accepted in the marketplace.

But not all technologies are created equal: those that aid commerce in a smart way will become critical in meeting the increasing demand for more flexibility and responsiveness in a networked commercial environment. The drive toward interoperable and distributed computing extends the very advantage of the Internet and World Wide Web technologies. Broadband networking, smart cards, and mobile network applications bring convenience and manageability in the network-centered en- vironment. New technologies and computing models such as XML and multitier distributed com- puting help firms to implement more efficient management solutions. These technologies, when combined, improve and reinvent existing business processes so as to meet flexibility and responsive- ness demanded by customers.

Nevertheless, regulatory as well as technical variables may become an important factor that hin- ders future growth of the Internet economy. Despite a high level of efficiency enabled by technologies, free markets are sometimes unable to produce efficient results when:

• Lack of information and uncertainty about products and vendors results in market failures.

• Goods and services have characteristics of public goods that private economies do not produce sufficiently.

• An industry is dominated by a monopoly or a few oligopolistic firms where outputs are reduced and prices are higher than competitive markets.

• Market players do not enjoy a transparent and universal commercial environment.

In such cases, a third party such as a government needs to intervene to provide information, promote goods production, and regulate and provide legal and commercial infrastructure. Even in the free-spirited Internet, governments play many essential roles as policy-making bodies. Business and regulatory policies as well as taxation influence firm organization and behaviors, competition, and profit levels, which ultimately determine the level of consumer welfare. (For more in-depth discussion on policies toward electronic commerce, see Choi et al. [1997] and Choi and Whinston [2000]).

Should governments regulate online markets? Various types of inefficient markets can be made efficient through regulation. A primary example is regulation of monopolies, lowering prices and increasing outputs. Health and safety regulations protect consumers. At the same time, however, regulators may be ‘‘captured’’ by those who are being regulated and protect firms’ interests against consumer welfare and market efficiency. Regulation of online commerce may have similarly contro- versial results. It may protect consumers’ interests and ensure efficiency. On the other hand, it may hinder the growth of online business. Regardless of its final effects, there is a growing list of online business activities that receive increasing attention from government agencies that want to regulate them.

In addition to still-evolving government policies toward e-commerce, technological factors con- tinue to pose challenges to those doing business on the Internet. Recent episodes of distributed denial of service (DDoS) attacks on major e-commerce sites, where web servers are flooded with bogus service requests to the degree that normal customers become unable to connect, show how vulnerable Internet-based commerce can be. Despite heavy interest and large investments in security measures and technologies, DDoS attackers take advantage of the open infrastructure that lies at the bottom of the Internet telecommunications networking and are able to interrupt its normal performance through various types of requests, often using a host of third-party servers who become unwitting partners of the attack.

Technologies alone are unable to provide a sure firewall to prevent such attacks as long as the basic TCP / IP network of the Internet cannot distinguish the type of traffic that runs through or there exist some insecure servers on the network who become free riders on such attacks (Geng and Whinston 2000). Increasingly, economic analysis and tools are becoming an essential ingredient in solving technological problems.

Despite policy and technical barriers, the number of business applications based on the Internet is growing rapidly into teleconferencing, logistics support, online services in banking and medicine, customer service through chat lines, online publishing, distance learning, and broadband / mobile content delivery. In essence, the Internet has become the information infrastructure necessary to carry out various types of business operations, market processes, and transactional requirements in the fully digital economy. Any effort to reengineer business and industrial processes in the 21st century will necessarily involve the use of the Internet and its associated applications. Understanding the economic aspects of the Internet will become the final challenge in promoting and selecting a winning com- bination of technologies and business models.

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