Abstract
Very early in the evolution of e-commerce, predictions were made that a significant degree of disintermediation would occur, i.e., that middlemen would be eliminated from the value chain through the use of the Internet. The reasoning was as follows. The economic benefit of middlemen, or intermediaries, is that they reduce transaction costs for functions that are outside the firm (Coase, 1937). Therefore, as digital technology reduced transaction costs in the open market, the role of these middlemen would be threatened (Tapscott, 1996; Downes & Mui, 1998). However, intermediaries have proven to be remarkably robust, even as they have transformed their roles and functions. The success of e-commerce firms like Amazon, eBay, and Yahoo is a testament to the continued value of intermediation. Even in an economy reshaped by digital technology, intermediaries still add value, and find new ways of doing so. This article examines the evolution and robustness of intermediation in e-commerce, by examining the fundamental economics of intermediation in terms of economies of specialization, scale, and scope. It considers ownership, transformation, and agency as different dimensions of intermediaries. It examines various intermediary roles, and how they are combined, driven by economies of scope and strategic attempts to capture value. It discusses how the various intermediary roles are changing in e-commerce, through the impact of digital technology. The specific case of financial intermediaries, at the forefront of digital technology usage, provides several examples (Singh, 2000). The conclusion is that intermediaries are important and varied enough that they will survive and thrive in the era of ecommerce. Disintermediation will not be a general outcome. Traditional intermediaries that perform manual tasks, or are part of slow or inefficient value chains are in danger, but the economic roles that intermediation plays are unchanged by e-commerce, and will be carried out in new ways.
TopBackground
The term ‘intermediary’ covers many different types of functions, so an ideal classification is difficult. If an intermediary is literally a ‘middleman’, coming between a buyer and a seller in a specific transaction, then the term has a relatively narrow scope. An example of such an intermediary is a specialist on the floor of the New York Stock Exchange (NYSE). However, within the entire value chain for a product or service, from raw inputs to final consumption, many types of organizations or individuals can be viewed as intermediaries. Distributors and wholesalers are an obvious example, but retailers, too, are intermediaries between producers and consumers. Even a computer manufacturer like Dell is an intermediary in this broadest sense, because it collects hardware and software components from a variety of suppliers, and assembles them into computers that are ready to use. Similarly, UPS is an intermediary when it delivers the Dell computer to the household or firm that ordered it.
There is one crucial difference between Dell and UPS, which provides a first basis for classifying intermediaries (Besanko et al, 2008). When Dell obtains components and assembles them into a working computer, it takes ownership of those components. It also oversees the locational transformation: the buyer does not make a separate transaction for the delivery. What Dell sells is the computer delivered to the doorstep, including the delivery charge. UPS is also an intermediary, but it does not take ownership of the computer. Therefore we can divide intermediaries into those which take ownership, creating two separate market transactions, and those who do not, leaving just one market transaction. The specialist on the NYSE floor mostly plays the latter role, matching brokers representing buyers and sellers. Sometimes the specialist also buys or sells out of his or her inventory, thus taking ownership as well.
Key Terms in this Chapter
Value Creation: The process of increasing the consumption or use value of tangible and intangible goods, through physical, chemical, locational and other transformations
Value Chain: The sequence of activities that directly transform raw materials into final goods and services for consumption, as well as activities that indirectly support these transformations
B2C: Business-to-consumer; used to refer to sales to individuals in households
Disintermediation: Elimination of intermediaries or middlemen by internalizing their functions on either side of the transaction or value chain
B2B: Business-to-business; used to refer to inter-firm transactions
Economies of Scope: A situation in which average costs of production of for different goods or services are lower when the goods or services are produced together rather than separately
C2C: Consumer-to-consumer; used to refer to transactions between individuals
Economies of Scale: A situation in which average or unit costs of production for a good or service are lower for higher volumes or levels of production
Agent: anyone who is assigned a task on behalf of another
Intermediary: Any individual or organization that provides a value creating function somewhere along the value chain, excluding initial production of raw materials and final consumption