Microeconomic Aspects of E-Commerce

Microeconomic Aspects of E-Commerce

James E. Prieger (Pepperdine University, USA) and Daniel Heil (Hoover Institution, USA)
DOI: 10.4018/978-1-4666-9787-4.ch166
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E-commerce can be defined narrowly to refer only to purchases made through an electronic medium, or more expansively to refer to any use of ICT in business (although the latter may more properly be called e-business). This chapter will use the term e-commerce most often in the stricter sense, although in places it will discuss the impact of ICT in general, and the Internet in particular, on many aspects of how firms and consumers do business. As the importance of e-commerce has grown, so has the academic study of its impacts on firms’ strategy (Martínez -López, 2013; Prieger & Heil, 2014), management (Gunasekaran, Marri, McGaughey, & Nebhwani, 2002), performance (Clayton & Waldron, 2003; Johnston, Wade, & McClean, 2007; Romero & Rodríguez, 2010), and the economy (Borenstein & Saloner, 2001; Heil & Prieger, 2010; Lucking-Reiley & Spulber, 2001; Prieger & Heil, 2010; Terzi, 2011).

Growth in business-to-consumer (B2C) e-commerce, both in terms of sales and the fraction of total retail revenue, has been steady since 1999 when official statistics were first collected in the US (Figure 1). Retail e-commerce sales dipped slightly for a few quarters during the recent recession, but only because retail spending was down across the board. The average annual growth rate in B2C e-commerce revenue over 1999 to 2014 is 19.2% in nominal terms, and 16.4% after accounting for inflation.2 Retail transactions over the Internet were $304B in the US in 2014, accounting for 6.5% of all retail activity (US Census Bureau, 2015b). Retail e-commerce is thus still relatively small, in part because many consumers say they dislike certain things about online shopping such as shipping and handling charges, difficulties with exchanges, and uncertainty about attributes of the item at time of purchase (Kacen, Hess, & Chiang, 2013). Nevertheless, the revealed preference of consumers, as evidenced by growing online purchasing, shows that for more and more transactions the lower prices and greater convenience of e-commerce outweighs the perceived disadvantages.

Key Terms in this Chapter

Vertical Hubs: Virtual marketplaces that enable transactions between buyers and sellers, aggregate demand and supply, and enable price determination through a variety of mechanisms such as catalogs, real-time negotiation, and auctions.

Adverse Selection: A situation arising in contexts of asymmetric information in which one party knows more about the quality of a good than the other. In the context of trading a good, adverse selection from the inability to verify the quality of a good results in the “lemons problem” of only low quality products being offered for sale.

Search Good: A good which has attributes and quality that are easily verified before purchase. Contrast with credence and experience goods.

Credence Good: A good of which the quality is difficult to determine even after consumption (for example, an herbal remedy claiming to prevent future health problems or legal services used to prepare a contract). Contrast with a search good.

Obfuscation: In the context of online search, the practice by search providers of deliberately complicating the process of finding and comparing online goods for sale.

Price Dispersion: The presence in a market of a variety of prices at which an identical product is offered for sale.

ICT: Information and Communications Technology.

Moral Hazard: A situation in which one party in an economic transaction can take actions unobserved by the other party and to the detriment of the other party’s welfare. Moral hazard can arise only in cases of asymmetric information.

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