The Emerging Role of Electronic Markets
I n t e r n e t
E c o n o m i c s
Internet-based electronic marketplaces leverage information technology to match buyers and sellers with increased effectiveness and lower transaction costs, leading to more efficient, “friction-free” markets.
The Emerging Role of
Electronic Marketplaces on the Internet
Markets play a central role in the economy, facilitating the
Yannis Bakos
exchange of information, goods, services, and payments. In the process, they create economic value for buyers, sellers, market
intermediaries, and for society at large. Recent years have seen a dramatic increase in the role of information technology in markets, both in traditional markets, and in the emergence of electronic marketplaces, such as the multitude of Internet-based online auctions.
Functions of a Market Markets (electronic or otherwise) have three main functions, summarized in Table 1: matching buyers and sellers; facilitating the exchange of information, goods, services and payments associated with market transactions; and providing an institutional infrastructure, such as a legal and regulatory framework, that enables the efficient functioning of the market. In a modern economy, the first two functions are provided by intermediaries, while the institutional infrastructure is typically the province of governments. Internet-based electronic marketplaces leverage information technology to perform these functions with increased effectiveness and reduced transaction costs, resulting in more efficient, “friction-free” markets. Matching Buyers and Sellers. Markets “clear” by matching demand and supply. This process of matching buyers’ demand with sellers’ product offerings has three main components: determining
Matching buyers and sellers • Determination of product offerings - Product features offered by sellers - Aggregation of different products • Search (of buyers for sellers and of sellers for buyers) - Price and product information - Matching seller offerings
E c o n o m i c s
Internet-based electronic marketplaces leverage information technology to match buyers and sellers with increased effectiveness and lower transaction costs, leading to more efficient, “friction-free” markets.
The Emerging Role of
Electronic Marketplaces on the Internet
Markets play a central role in the economy, facilitating the
Yannis Bakos
exchange of information, goods, services, and payments. In the process, they create economic value for buyers, sellers, market
intermediaries, and for society at large. Recent years have seen a dramatic increase in the role of information technology in markets, both in traditional markets, and in the emergence of electronic marketplaces, such as the multitude of Internet-based online auctions.
Functions of a Market Markets (electronic or otherwise) have three main functions, summarized in Table 1: matching buyers and sellers; facilitating the exchange of information, goods, services and payments associated with market transactions; and providing an institutional infrastructure, such as a legal and regulatory framework, that enables the efficient functioning of the market. In a modern economy, the first two functions are provided by intermediaries, while the institutional infrastructure is typically the province of governments. Internet-based electronic marketplaces leverage information technology to perform these functions with increased effectiveness and reduced transaction costs, resulting in more efficient, “friction-free” markets. Matching Buyers and Sellers. Markets “clear” by matching demand and supply. This process of matching buyers’ demand with sellers’ product offerings has three main components: determining
Matching buyers and sellers • Determination of product offerings - Product features offered by sellers - Aggregation of different products • Search (of buyers for sellers and of sellers for buyers) - Price and product information - Matching seller offerings
References: 1. Arthur, B. Increasing returns and the new world of business. Harvard Business Rev., (July–Aug. 1996), 100–109. 2. Bailey, J. and Bakos, Y. An exploratory study of the emerging role of electronic intermediaries. International J. Electronic Commerce 1, 3 (Spring 1997). 3. Bailey, J. and Brynjolfsson, E. In search of friction-free markets: An exploratory analysis of prices for books, CDs and software sold on the Internet. In Proceedings of the 25th Telecommunications Policy Research Conference (Alexandria, VA, Sept. 1997). 4. Bakos, Y. Interorganizational information systems: Strategic implications for competition and cooperation. Ph.D. dissertation, Sloan School of Management, Massachusetts Institute of Technology, 1987. 5. Bakos, Y. Reducing buyer search costs: Implications for electronic marketplaces. Manage. Sci. 43, 12 (Dec. 1997). 6. Bakos, Y. and Brynjolfsson, E. Bundling information goods: Pricing, profits and efficiency. Working paper, Stern School of Business, New York University, 1997; www.stern.nyu.edu/~bakos/big.pdf. 7. Cortese, A. and Stepanek, M. Special report on E-commerce: Goodbye to fixed pricing. BusinessWeek, May 4, 1998 (by subscription at www.businessweek.com/@@khe91YQASKecmwAA/1998/18/b35760 23.htm). 8. Delivering the Goods. Fortune, November 28, 1994. 9. Gates, W. The Road Ahead. Penguin Books, New York, 1995. 10. Gellman, R. Disintermediation and the Internet. Government Information Q. 13, 1 (1996), 1–8. 11. Guttman, R., Moukas, A., and Maes, P. Agent-mediated electronic commerce: A survey. Knowledge Engineering Review, June 1998; ecommerce.media.mit.edu/papers/ker98.pdf 12. Riggins, F. A framework for identifying Web-based electronic commerce opportunities. Working Paper, DuPree School of Management, Georgia Institute of Technology, February, 1998; riggins-mgt.iac.gatech.edu/papers/ecvalue.html The Role of Electronic Intermediaries It has been argued that as friction-free electronic marketplaces lower the cost of market transactions, it will become easy to match directly buyers and sellers, and as a result, the role of intermediaries may be reduced or even eliminated leading to “disintermediation” (see [9, 10]). While the growth of Internet marketplaces may lead certain types of intermediaries to extinction, the discussion in the previous sections suggests that electronic marketplaces will more than compensate for this by promoting the growth of new types of electronic intermediaries. These intermediaries will perform functions that include matching buyers and sellers, providing product information to buyers and marketing information to sellers, aggregating information goods, integrating the components of consumer processes, managing physical deliveries and payments, providing trust relationships and ensuring the integrity of the Yannis Bakos (bakos@stern.nyu.edu; www.stern.nyu.edu/~bakos) markets. will be joining the Stern School of Business at New York Presently, Internet-based electronic intermedi- University as an associate professor of Management. aries often “freeload” on traditional intermediaries Permission to make digital or hard copies of all or part of this work for personal or classfor various reasons, such as the physical experience room use is granted without fee provided that copies are not made or distributed for commercial advantage and this notice and that is still important in several markets before a profit or page. To copy otherwise, tothat copies bearpost on servers orthe full citation on the first republish, to to redistribute to buyer can select an appropriate product offering. For lists, requires prior specific permission and/or a fee. example, car buyers may test drive a vehicle at a traditional dealer, and subsequently purchase it through Auto-by-Tel. This clearly cannot be sus- © 1998 ACM 0002-0782/98/0800 $5.00 42 August 1998/Vol. 41, No. 8 COMMUNICATIONS OF THE ACM