Internet commerce can substantially improve productivity by lowering transaction, production and distribution costs, facilitating market entry, improving customer service, extending geographical coverage and increasing competition.
Internet commerce can substantially improve productivity by lowering transaction,
production and
distribution costs, facilitating market entry, improving customer service, extending geographical coverage
and increasing competition. This should lead to lower prices, improved quality and innovative new products
and services, which should further increase economic growth and welfare. Some of the benefits associated
with commerce over the Internet include (a) better availability of information, (b) global reach, (c) reduced
transaction costs, (d) lower barriers to entry, and (e) new sources of revenue.
(a)Better availability of information: Online commerce enables better access to product and price
information for all involved including buyers and sellers, producers and distributors. Already, searchagent
software allow users to look for the lowest prices around the world. A new breed of
‘infomediaries’ has emerged that base their operations on bringing more complete product information
to customers. Excite Inc. search engines, for instance, offer a comparison-shopping service called Jango
(jango.com), which screens a range of online merchants and brings back the best prices for specific
books, compact discs or other products. Many others offer similar service, such as Hotbot (hotbot.com)
by Wired Ventures. A fast growing auction house that brings buyers and sellers together and claims to
have been profitable from day one is eBay (ebay.com). Compare.net finds products that match the
features and price range that the user has specified. The user can then jump to the indicated site to make
a purchase.
(b) Global reach (production, distribution and customer service): Distance and time become less relevant
as companies are able to reach their business partners across the globe and serve their customers quickly
and around-the-clock. Producers will often be able to choose a place for production and customer
service much independently from the location of their customers. Companies and individuals in low
income countries are able to reach information and get contacts in ways which were difficult earlier—
either due to the nature of voice communication and/or its very high cost.
(c) Reduced transaction costs: Cost reduction has been one of the main motivations for early adoption of
the Internet. E-commerce should also offer improved transaction management thanks to automated
order, payment and logistics processing systems. Cisco Systems reports reducing its expenses by
US$ 500 million thanks to the Internet
(d) Lower barriers to entry: The capital cost of entry to establish a presence online is low compared to
conventional outlets. The cost of establishing a reputation on the Internet can also be lower than in
traditional established markets. A modest investment in a brilliant idea can eventually lead to good
results. Small and medium-sized enterprises (SMEs) benefit from easier market entry. But considering
the amount of unsuccessful business endeavors online, the actual cost of setting up a profitable
business is probably higher than believed. With increasing global competition in electronic business,
many argue that global brands will continue to dominate, while SMEs will have to specialize to niches
in order to compete.
(e) New source of revenue: In 1998, nearly half of website managers claim that their online businesses are
profitable (46 per cent, up from 30 per cent recorded in the last three years). The highest profits are
reported among retail websites selling directly to consumers—around half of them are profitable today.
Of the websites that generated revenue in 1997, the average was a little over US$ 100’000. About 30 per
cent generated revenues under US$ 1’000 and 25 per cent had revenues between US$ 1’000 and
US$ 10’000. Yet, the reality is that today few companies are making big profits on the Internet. Only
1 per cent of the b-to-b online businesses generated revenues above one million US dollars in the year.
Not even the widely admired Amazon.com, in the Internet book selling business, is expected to be
profitable before 2001.
