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Electronic (E) Commerce
Lecture 1


Electronic Commerce

Read Chapter 9 – Diffusion of Electronic Commerce
Read pages 241-253.
Read Conclusion pages 268 -269
Ship the math section

  1. Electronic commerce technology – business transactions that uses the internet

    • i.e. E-commerce

    • Internet companies – developed exclusively this technology

    • Examples

      • Amazon.com – buy books over the internet

        • Use credit cards to process payment and then send books through mail

      • Netflix.com – rent DVD movies

        • Pay a fix rate each month with credit card and receive DVD’s in mail. When done, send them back

        • Netflix allows people to watch movies via internet

      • Ebay.com – buy and sell items through internet

        1. Anyone can sell or buy with an Ebay account

        2. Auction

        3. Highest bidder gets the item

        4. Games, DVDs, laptops

        5. Even cars and real estate

    • Older corporations – implemented the internet

      • Usually the leader was an internet company that formed using the internet

        • Older corporations played catch up

      • Borders / Barnes and Nobles – brick and mortar store that now sales books through internet

      • Blockbuster Videos – DVD rentals

  2. Using E-commerce

    • Consumers have to learn how to use it

      • Usually younger people know how to use it

      • Older people usually do not buy through the internet

    • Internet connection speed greatly increased

    • Easy Access to internet

      • Coffee shops, airports, libraries, hotels, etc. give (free) access to high-speed internet access

  3. Firms want to adopt e-commerce

    1. E-commerce changes the way to do business

      • Internet company

        • Needs a warehouse for products

          • Warehouse workers who stock, package, and ship products

        • Computer servers with specialize databases

          • Computer specialists

        • Companies usually use UPS, DHL, or the postal service to deliver products

      • Traditional companies

        • Stores have monthly leases and store employees

        • Distribution system

          1. Have warehouses where the company buys from suppliers

          2. Use trucks, barges, and trains to ship products from warehouse to stores

        • Traditional companies must be much bigger

  4. Benefits of E-Commerce

    1. Internet companies have lower transaction costs

      • Eliminates retail space and sales force

      • Sales force is the largest fraction of traditional retailers’ costs

      • Making payments, keeping records, managing inventory, ordering, invoicing, and exchanging information with customers, employees, and suppliers are all electronic records

    2. Internet companies stock a much larger selection of products

      • Consumers can rapidly search through products over internet

  5. Problems

    1. Consumers have different utility levels for buying in stores versus the internet

    2. Consumers

      • Cannot physically inspect the good over the internet

      • A problem for internet companies that sell clothes

        • Some stores like Gap allow customers to physically return clothes bought from its website and return it to the store

        • Retail – consumers tend to be loyal to stores and brands

    3. Consumers have to wait for product delivery

      • Anywhere from overnight shipping to three weeks

      • The faster the delivery, the more it costs

    4. Consumers cannot inspect quality

    5. Consumers may have loyalty to a traditional business

      • They prefer to shop at their favorite traditional store

      • Traditional business may charge a greater price

        • Consumer loyalty gives a firm a little monopoly power

    6. Consumers are reluctant to give out credit card or bank information to new firms

      • Quite dangerous

      • Fraudulent companies can clean out a bank account or charge thousands of dollars of charges

      • Note – Some internet companies sprang up that handles payment for two parties

        • Anyone can buy or sale from anyone without giving out bank information

          • Paypal.com – a spin off of Ebay

          • Google pay

        • These companies handle payment between two people and also handle complaints

    7. Note – consumers may develop loyalty to an internet business where the consumers have had positive experiences

      • Consumers may pay a little more for trust

  6. Traditional companies adopted e-commerce

    • Expand their customer base

    • Expand geographic location – anyone with internet access, credit card, and postal service can buy through internet

    • Close down non performing stores without losing customers

    • Expand buying hours – internet is on 24 hours a day, 7 days a week

  7. Should a traditional company adopt e-commerce?

    1. Cannibalization – if traditional company adopts e-commerce, their regular customers switch from store to internet purchases

      • They attract no new customers to their stores

      • Thus, their costs increase

        • Cannibal – a person who eats human flesh

    2. Bureaucratic resistance – traditional companies tend to be large companies with layers of management, especially large corporations

      • Slower to adopt technology

      • Internet company can be created in a dorm room

  8. Internet sales were approximately 2% in 2002

    1. Books and magazines 46%

      • Amazon.com was first in selling books and Barnes and Noble, the traditional book store, entered the market later

        • Books are homogenous products

        • Americans have been buying books from catalogs through the mail

        • Customers may not be loyal to book stores

    2. Electronics 46%

    3. Office equipment and supplies 40%

    4. Other products that are suited for the internet

      • Homogeneous products

      • Digital products, such as software, MP3 music, and movies

        • Digital products eliminate the need for a warehouse

          • No physical products

          • Thus, lowers costs

        • Problem – easy for people to copy and use products without paying for them

          • Cuts into revenue

        • Economics

          • Software, music, and movies have high fixed costs

            • Requires a lot of effort to create them

          • However, these products have almost zero marginal costs

            • Costs almost nothing to distribute and sell products

      • Stocks and insurance

        • Some financial companies allow people to buy and sell stocks

        • Example – I pay for my car insurance through the internet

        • Internet stock companies – Datek.com, Ameritrade.com, and E-trade.com

          • Charles Schwab, a traditional company, also entered e-commerce early

          • 40% of consumers (or investors) are sensitive to prices for stock sales and purchases

            • E-commerce lowered the transaction cost to buy and sell stocks

            • Consumers also were not interest in financial advice

        • My opinion – I think the internet companies held a large pool of stocks and allowed it customers to buy and sell stocks within house

        • Traditional financial companies – concentrated on full service and personalized advice for investors

    5. Sales are taking off for jewelry companies

      • Blue Nile, Ice.com, and Amazon.com sell diamonds over the internet

        • Diamonds tend to have layers of middlemen

          • Experts, appraisers, and sales force are eliminated

        • Have cost savings

        • Note – ice is slang for diamonds

  9. E-commerce flourished under low taxes

    • Example – Amazon.com is located in California

      • California customers pay sales tax while customers from other states do not

    • 2008 Financial Crisis – many state governments are having severe financial crises

      1. Proposals to tax the internet

      2. Approx. 7,000 tax authorities

      3. Tax authority – state, county, or city government that collects taxes


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