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The Economics of Electronic Commerce

This book is written in the belief that the tenets and teachings of economics are vital to an insightful analysis of the broad spectrum of issues affecting commercial uses of the Internet and the next-generation information infrastructure. Our digital future is being decided on the Internet, where prototypical products and services have been test-driven by an odd collection of individuals. Just a few years ago, commercial uses of this somewhat chaotic and decentralized network of networks seemed highly unrealistic. Today, while the government and large corporations are grappling with proposals on how to build the national information infrastructure, major components of | The Economics of Electronic Commerce PREFACE This book is written in the belief that the tenets and teachings of economics are vital to an insightful analysis of the broad spectrum of issues affecting commercial uses of the Internet and the next-generation information infrastructure. Our digital future is being decided on the Internet, where prototypical products and services have been test-driven by an odd collection of individuals. Just a few years ago, commercial uses of this somewhat chaotic and decentralized network of networks seemed highly unrealistic. Today, while the government and large corporations are grappling with proposals on how to build the national information infrastructure, major components of commercial use of the Internet—users, technologies, and digital contents—are already converging, aided by the rapid acceptance of the user friendly World Wide Web. What The Economist called an "accidental superhighway" has become the hottest commercial medium. While there is a considerable uncertainty about who will be the winners and what products and technological standards will dominate this new arena, the basic foundation for a totally unique competitive market has been laid and so has the stage for a fundamental market analysis using economics. Defining Electronic Commerce As a Market Electronic commerce goes far beyond simply "doing business electronically." Doing business electronically means that many conventional business processes such as advertising and product ordering are being digitized and conducted on the Internet. However, the Internet is not a mere alternative channel for marketing or selling products online—i.e. the most recent alternative to mail-order business, catalog shopping, home shopping networks and direct marketing. Instead, the electronic marketplace enables sellers to innovate the whole business processes from production to customer service— which were said to occur in stages—by integrating them in a seamless whole, where, for