Economic effects of e-commerce

Transcription

1 40 Economic effects of e-commerce Frans Suijker* Abstract Although still in its infancy, electronic commerce (e-commerce) may have large economic effects in the future. E-commerce can improve the transparency of markets and can result in efficiency gains via lower procurement and inventory costs and better supply chain management. It can also be a source of new products. During a transitory period, a surge in e-commerce may boost macroeconomic growth and reduce inflation, if markets function well. This note explores the potential microeconomic, sectoral and macroeconomic effects of e-commerce. Introduction This note explores the economic impact of e-commerce by identifying potential effects at the microeconomic, sectoral and macroeconomic levels and linking these effects. This can be useful for assessing the overall net impact of e-commerce. This paper uses a broad definition of e-commerce. Electronic commerce is the exchange of information across electronic networks, at any stage in the supply chain, whether within an organisation, between businesses, between businesses and consumers, or between the public and private sectors, whether paid or unpaid 1. This broad definition stresses the importance of an efficient exchange of information, whereas narrower definitions refer only to electronic transactions. This note focuses on e-commerce between businesses (B2B) and between businesses and consumers (B2C). At present, electronic sales still represent a relatively small share in total economic activity. In 2001, Internet sales accounted for only 1% of total retail sales in the United States (US Department of Commerce (2002)). B2B e-commerce is larger than B2C e-commerce, but is spread unevenly at the industry level. In US manufacturing, e-commerce shipments account for 18.4% of the total value of manufacturing shipments, while e-commerce * For more information, contact Frans Suijker (tel: ; f.w.suijker@cpb.nl) sales represent 7.7% of total merchant wholesale trade sales. In contrast, e-commerce accounts for less than 1% of sales among retailers and a group of selected service industries. In the Netherlands, e-commerce shares are even lower than in the United States (Statistics Netherlands (2002)). However, e-commerce has the potential for huge growth and high economic impact in the future. Microeconomic effects of B2C e-commerce in search goods Figure 1 sketches the microeconomic effects of a rise in B2C e-commerce in search goods. Search goods are goods of which the quality can be ascertained by consumers before a purchase (Tirole (1988)). Examples are a specific book or a PC with specific features. The figure indicates that ICT enables e-commerce. E-commerce has two main effects. It can enlarge the transparency of markets and open the door for new products and production processes. More transparency and higher efficiency may produce quite positive welfare effects. Figure 1 also indicates the macroeconomic consequences that will be discussed below. Furthermore, figure 1 offers useful elements for assessing the sectoral effects. Consumers can search for the lowest price of certain search goods on the Internet. They can buy from foreign sellers, and sellers can reach more buyers. Markets thus become not only more transparent, but also larger. Therefore, e-commerce can intensify competition. This results in lower profit margins and a decrease of X-inefficiency 2. The broadening of markets offers the opportunity to exploit economies of scale. In the end, consumers face lower prices 3. Furthermore, the higher level of transparency causes lower search and transaction costs (in time and money). A better fit between demand and supply is possible because of increased information and choice. Intensified competition and adoption of network technology may also result in an adjustment of production processes. A fast and efficient exchange of information within a firm and with suppliers and customers 4 can reduce the cost of procurement, production and sales. Better supply chain management may increase efficiency. The higher productivity may lead to lower prices. Furthermore, the new technology may create new goods and services. To conclude, e-commerce in search goods may cause lower prices (as a result of greater transparency of markets and higher

2 Figure 1 Microeconomic effects of B2C e-commerce in search goods More transparent and larger market Adoption of ICT better fit of demand and supply lower search- and transaction costs more economies of scale stronger competition lower profit margins decrease in X-inefficiency lower procurement, production and sales costs increase in productivity higher welfare lower prices new products indicates macro-economic consequences higher welfare 41 efficiency). The rise of e-commerce in search goods can be interpreted as a rightward shift of the supply curve that increases welfare. However, e-commerce can have less positive effects, especially because intensified competition may not happen 5. For instance, economies of scale and a good reputation can offer a few e-tailers (for example, Amazon) some market power on an electronic market. Increased transparency also makes it easy for competing firms to compare prices and to react immediately to the price decreases of competitors. This knowledge can even be an incentive not to change prices, and in that way it may result in tacit collusion. Furthermore, producers may react to intensified competition by product differentiation. It may thus be more difficult for consumers to compare products on the Internet. They must compare not only prices but also quality characteristics. Prices may not fall, in this case, although a positive welfare effect may still be experienced due to the greater variety of goods. Microeconomic effects of B2C e-commerce in other goods E-commerce in goods other than search goods may also have less positive effects. For instance, most experience goods are not fit for electronic transactions because consumers first want to see, touch or try these goods before buying (for example, cars and houses). So, competition for these goods will not intensify strongly. However, the Internet is a useful instrument for collecting information about these goods. It may lower search costs for consumers and sales costs for producers, and may improve the match between demand and supply. A special category of (experience) goods are digitised information goods (music, games, software). These goods are characterised by high fixed costs of product development and low marginal costs of production. By way of a diversified pricing policy (personalised pricing, versioning and group pricing) and distribution methods (focus groups, free samples, share ware) producers of information goods try to maximise their sales as soon as possible in order to make up for the sunk costs (Shapiro and Varian

3 42 (1999)). Distribution costs of digital goods are very low. Moreover, digital distribution has low external effects on the environment, because trucks are not needed to deliver goods. Furthermore, information goods such as software exhibit network and lock-in effects. The value of such goods increases with the number of people that already use the product (network effects). Buyers have costs when they switch to other software systems because they need training in order to use the software. These switching costs may lead to consumer lock-in and monopoly exploitation. Even winner-take-all effects are possible. Microeconomic effects of B2B e-commerce The economic impacts of B2B e-commerce are the same as for B2C e-commerce. More transparency and higher efficiency may result in lower prices. In competitive markets, the lower procurement costs of firms also cause consumer goods prices to drop, thereby promoting higher welfare. B2B e-commerce can have a strong impact on business models. There has been considerable growth in the number of e-marketplaces and private exchanges. E-markets are public electronic marketplaces, such as the automotive parts exchange Covisint, that bundle the demand and supply of individual firms for a specific good or service. Large companies, such as Philips, Wall-mart and Cisco, have private exchanges that allow selected suppliers to get orders directly in line with the sales of these companies. At e-marketplaces, the transparency-effect of e-commerce dominates; at private exchanges, the efficiency-effect has the upper hand. The advantage of private exchanges for large companies is that they reveal sensitive sales information to only a small group of suppliers and not to rivals. Furthermore, firms do not have to change their existing software systems and can invest in integrating logistics of both the firm itself and the suppliers in order to improve the efficiency of the supply chain. In this way a private exchange can offer a competitive advantage for a firm. Therefore, private exchanges may prove more successful than e-marketplaces. The Economist (May, 19th 2001) estimated that $ 20 billion of goods and services were traded on the private exchanges of General Electric in 2001, more than on all public e- markets together. Macroeconomic effects In the short-run, efficiency gains and greater transparency may produce lower prices and higher output. In the long run, the growth of gross domestic product (GDP) is determined by the growth in labour supply and the growth in labour productivity. Improvements in efficiency due to the adoption of network technology can boost macroeconomic productivity growth during a period of rise in e-commerce. However, it is uncertain whether during a transitory period such a rise will lead to acceleration in productivity growth, because older technologies may no longer increase productivity. A recent report of the US Department of Commerce (2002) states that the continued strong productivity growth during the economic downturn of 2001 suggests that US industries are continuing to benefit from past and current investments in IT equipment, software and services, and related human skills. Goldman Sachs (Brookes and Wahhaj (2000)) assessed the macroeconomic impact of e-commerce. According to analyst estimates, the potential gains of B2B e-commerce via lower procurement costs range between 2 and 40 percent of total input costs (depending on the industry). The average decline in GDP prices in the US, Japan, Germany, France and the UK resulting from this input price shock is 3.6% (using an input-output framework with no output effects, and ignoring the timing of the effects). In the long term, this shock could boost GDP in the major industrialised countries by almost 5%, just over half of which comes through in the first ten years. So, annual GDP growth in the large industrialised countries could rise 0.25% a year during this decade. In the long term, the effect on prices is less substantial than the primary effect because of the induced higher demand. Of course, the results of the Goldman Sachs study should be interpreted with great caution. Sectoral effects A rise in e-commerce can have quite different effects at the industry level. Inter alia, the sectoral effects depend on the kind of goods and services produced by a sector, the position of a sector in the supply chain, the features of the production process and the intensity of competition on relevant markets. Researchers at the University of Texas (2001) made a useful conceptual framework for the Internet economy that takes account of the interrelatedness of branches of industry. The framework breaks down the Internet economy into four layers. The first layer is the Internet infrastructure layer, which offers the physical infrastructure for e-commerce. It consists of telecommunication companies, Internet service providers and manufactur-

4 ers of end-user network equipment. On top of the physical infrastructure, layer two builds the Internet applications infrastructure. This layer includes the consultant and service companies that design, build and maintain all types of web sites, from portals to full e- commerce sites. Layers one and two enable economic activities on the Internet and mainly consist of the ICT sector. Thus, the ICT sector will primarily benefit from the rise in e-commerce. Economic activities on the Internet are divided into the last two layers: electronic intermediaries and online transactions. Internet intermediaries increase the efficiency of electronic markets by facilitating the meeting and interaction of buyers and sellers over the Internet. They play a crucial role in filling information and knowledge gaps, i.e. in lowering search and transaction costs. This third layer includes market makers, online travel agencies, online brokerages, content providers and online advertising. The fourth layer includes companies that generate sales of goods and services over the Internet. E-commerce constitutes a new sales channel, alternative to conventional retail technology. So, displacement of traditional businesses is possible, especially in wholesale sales and retail trade. However, traditional businesses can choose a multi-channel sales strategy. For example, one of the most successful Dutch e-tailers is an old mail-order company. Furthermore, manufacturing firms may supply their goods directly to consumers, without the mediation of wholesalers and retailers. The Texas model uses a narrow definition of e-commerce. When a broad definition is adopted, the fourth layer contains all users of network technology and is the main part of the economy. The Texas model can be further extended by taking into account the differences in the impact of network technology between branches of industry in the fourth layer. For instance, in information-intensive industries the business model can change completely because of new services. In other industries the core business may not alter substantially, although the use of network technology may incline cost savings. Some of these industries may also face market changes because of more transparency and intensified competition. Concluding remarks Fierce competition will force firms in many markets to improve efficiency. One way for firms to achieve greater efficiency is through e-commerce, which, although still in its infancy, has the potential for huge growth, particularly between firms. Especially private exchanges offer a great opportunity. To achieve these efficiency gains, firms will have to make strong investments in ICT and reorganise their operations. Consumers, still concerned about quick and appropriate delivery of Internet orders and fearing abuse of personal information, may hamper a strong growth of B2C e-commerce, although low prices and convenience may stimulate Internet sales. A surge in e-commerce may boost macroeconomic growth and reduce inflation during a transitory period, if markets function well. Large sectoral effects are also possible. References 43 Figure 2 The Internet economy Bartelsman, E.J. and M. Doms, 2000, Understanding productivity: Lessons from longitudinal micro data, Journal of Economic Literature, vol. XXXVIIII, pp Brookes, M. and Z. Wahhaj, 2000, The shocking economic effect of B2B, Goldman Sachs Global Economics Paper no. 37. Layer 4 : E-commerce activities a. industries with new business models b. industries facing strong changes in market conditions c. industries only achieving cost savings Layer 3 : Intermediaries Layer 2 : Applications Layer 1 : Internet infrastructure Damme, E. van, and B. Dellaert, 2001, E-conomy: ICT and the functioning of markets (In Dutch: E-conomie: ICT en marktwerking), CentER, Tilburg, March 2001, Friberg, R., M. Ganslandt and M. Sandström, 2000, E-commerce and prices - theory and evidence, SSE/EFI working paper no Janssen, M.C.W. and J-L Moraga, 2001, Competition and use of Internet (In Dutch: Concurrentie en Internet-gebruik), Maandschrift Economie, vol. 65, pp Performance and Innovation Unit of the Cabinet Office, 1999, e.commerce@its.best.uk, ( Shapiro, C. and H.R. Varian, 1999, Information rules, A strategic guide to the network economy, Harvard Business School Press.

5 Statistics Netherlands, 2002, The Digital Economy 2002 (In Dutch: De Digitale Economie 2002), Voorburg. Tirole, J., 1988, The theory of industrial organization, Cambridge, MA: MIT Press. University of Texas, 2001, Measuring the Internet economy, ( US Department of Commerce, 2002, Digital Economy 2002, ( Notes 1 Performance and Innovation Unit of the Cabinet Office (1999). Instead of e-commerce according to the broad definition, the term e-business is used more and more. 2 Bartelsman and Doms (2000) assert that there are still large differences in efficiency between similar firms in the same branch of industry. However, it is possible that competition will intensify substantially only as the number of Internet buyers reaches a critical level (Friberg et al. (2000)). 3 This price includes delivery or purchasing costs and search costs, since the price paid by consumers to purchase an item on the Internet includes delivery costs. Therefore, the comparable price for traditional shopping contains the value consumers place on their time to get to and from the stores and their other travel costs. 4 In this way, e-commerce may act as a new stimulus for ERP (enterprise resource planning) and CRM (custom relationship management). 5 Therefore, some researchers (Janssen and Moraga (2001) and Van Damme and Dellaert 44 (2001)) distinguish an optimistic and a pessimistic view on the effects of e-commerce. Note that this distinction refers especially to the transparency effect of e-commerce, and not to the efficiency effect. Furthermore, e-tailers compete not only with themselves, but with old-fashioned retailers as well. Janssen and Moraga (2001) and Van Damme and Dellaert (2001) also review in more detail the effects of e-commerce in experience goods and information goods.