The Microeconomic Impacts of E-Business on the Economy

The Microeconomic Impacts of E-Business on the Economy

James E. Prieger (Pepperdine University, USA) and Daniel Heil (Pepperdine University, USA)
DOI: 10.4018/978-1-61520-611-7.ch002
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Abstract

The use of information and communications technology (ICT) in business—the most expansive definition of e-business—is transforming the world economy. E-business at the microeconomic level of retail, wholesale, and labor market transactions has an enormous impact on the performance of companies and the economic welfare of consumers and workers. The gains in efficiency and economic benefits at the microeconomic level exert influence all the way up to the macroeconomic level of GDP and fiscal and monetary phenomena. However, new policy challenges accompany the rewards from ebusiness in the economy. The economics of e-business are shaped by the way that ICT lowers the cost of transferring, storing, and processing information (Borenstein & Saloner, 2001). When the cost of information falls, there are profound consequences for how firms conduct business with each other, with consumers, and with workers. This article covers both the economic theory that suggests how e-business changes the economy (to understand why e-business has proliferated) and the empirical magnitude of the impacts (to show the economic benefits).
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Background

Information is the key component of the modern economy. While pure knowledge is disembodied, transferring, storing, and processing information is costly for firms and consumers. E-business has such a great impact on today’s economy because ICT lowers the costs associated with information. Viewed through the lens of cost reduction, transformations of the production process enabled by e-business such as outsourcing, electronic procurement, and online trading not only make sense but also become predictable. Similarly, given the importance of information in search and matching markets such as consumer purchasing and the labor market, the advent of electronic intermediaries such as auction sites and online resume exchanges makes sense. Wherever the costs involved with transacting information are high, the gains from adopting e-business practices are highest and the market will naturally implement ICT there first.

Reduced informational costs cannot only facilitate given transactions, but can expand the set of transactions included within a specific market. By lowering the costs of bringing together geographically distant buyers and sellers, e-business increases the size of any given market. Larger markets make the trade of goods and services more reliable and efficient, in part because bigger markets often have lower average costs associated with them. However, the aggregation of information in larger markets is beneficial in its own right, especially compared to the bilateral negotiation between economic agents that e-business may replace. The inefficiency of bilateral negotiation—that some mutually beneficial trades may not occur—is due to the asymmetric information (e.g., on the reservation prices) held by the parties. Thicker markets mitigate such inefficiencies (Vulkan, 2003).

Key Terms in this Chapter

Price discrimination: The practice of charging customers different prices for the same good.

Disintermediation: The reduction or elimination of the use of market intermediaries that match producers to ultimate buyers in product markets or employers to employees in the labor market.

Total factor productivity: Productivity growth not explained by increases in inputs such as capital and labor. TFP captures all other factors influencing growth, such as improved uses of the measurable inputs and general technological progress.

Off-contract procurement: A firm’s purchase of inputs or materials from a source other than the approved supplier with which the firm has negotiated volume discounts or other concessions.

Elasticity of demand: A characterization of the sensitivity of the quantity demanded of a good to changes in price (in percentage terms).

Network effect: The effect whereby an economic agent’s valuation of a product (e.g., a trading platform) increases with the number of consumers of the product (e.g., the number of other traders on the platform).

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