Chapter 10

E-Commerce: Digital
Markets, Digital Goods

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Chapter 10 E-Commerce: Digital Markets, Digital Goods

LEARNING OBJECTIVES

Identify the unique features of e-commerce, digital

markets, and digital goods.
Describe how Internet technology has changed
business models.
Identify the various types of e-commerce and
explain how e-commerce has changed consumer
retailing and business-to-business transactions.
Evaluate the role of m-commerce in business, and
describe the most important m-commerce
applications.
Identify the principal payment systems for
electronic commerce.

Management Information Systems

Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce and the Internet

E-commerce
Use of the Internet and Web to transact business
More formally, e-commerce is about digitally enabled
commercial transactions between and among
organizations and individuals.

History of e-commerce
Began in 1995 and grew exponentially
The very rapid growth in e-commerce in the early years
created a market bubble in e-commerce stocks
Like all bubbles, the dot-com bubble burst in March 2001

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Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce and the Internet

History of e-commerce (Cont)

A large number of e-commerce companies failed during

this process.
Yet for many others, such as Amazon, eBay, Expedia, and
Google, the results have been more positive: soaring
revenues, fine-tuned business models that produce profits,
and rising stock prices.
By 2006, e-commerce revenues returned to solid growth,
and have continued to be the fastest growing form of retail
trade in the United States, Europe, and Asia.

Management Information Systems

Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce and the Internet

Figure 10.1: The Growth of E-Commerce

Retail e-commerce revenues grew 1525 percent per year until the recession
of 20082009, when they slowed measurably. In 2012, e-commerce revenues
are growing again at an estimated 15 percent annually.

Management Information Systems

Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce and the Internet

Eight unique features of e-commerce technology

1. Ubiquity

E-commerce is available just about everywhere, at all

times. It makes it possible to shop from your desktop, at
home, at work, or even from your car, using
smartphones.
2. Global reach
E-commerce technology permits commercial
transactions to cross cultural and national boundaries far
more conveniently and cost effectively than is true in
traditional commerce.

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Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce and the Internet

Eight unique features of e-commerce technology (Cont)

3. Universal standards

The technical standards for conducting e-commerce are

universal standards. They are shared by all nations
around the world and enable any computer to link with
any other computer regardless of the technology
platform each is using.
4. Richness
The Web makes it possible to deliver rich messages with
text, audio, and video simultaneously to large numbers
of people.

Management Information Systems

Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce and the Internet

Eight unique features of e-commerce technology (Cont)

5. Interactivity

E-commerce technologies are interactive, meaning they

allow for two-way communication between merchant and
consumer.
6. Information density
The Internet and the Web vastly increase information
densitythe total amount and quality of information
available to all market participants, consumers, and
merchants alike.

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Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce and the Internet

Eight unique features of e-commerce technology (Cont)

7. Personalization/Customization

E-commerce technologies permit personalization: Merchants

can target their marketing messages to specific individuals by
adjusting the message to a persons clickstream behavior,
name, interests, and past purchases. The technology also
permits customizationchanging the delivered product or
service based on a users preferences or prior behavior.
8. Social technology: User Content Generation and Social Networking

The Internet and e-commerce technologies have evolved to be

much more social by allowing users to create and share with
their personal friends (and a larger worldwide community)
content in the form of text, videos, music, or photos.

Management Information Systems

Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce and the Internet

Key concepts in e-commerce: Digital Markets and Digital Goods

Digital Markets

Digital markets reduce

Information asymmetry
Search costs

Transaction costs
Menu costs
Digital markets enable

Price discrimination
Dynamic pricing
Disintermediation

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Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce and the Internet

Figure 10.2: The Benefits of Disintermediation to the Consumer

The typical distribution channel has several intermediary layers, each of which adds to the
final cost of a product, such as a sweater. Removing layers lowers the final cost to the
consumer.

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Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce and the Internet

Key concepts in e-commerce (cont.)

Digital goods

Goods that can be delivered over a digital network

E.g., Music tracks, video, software, newspapers,
books

Cost of producing first unit almost entire cost of product:

marginal cost of producing 2nd unit is about zero
Costs of delivery over the Internet very low
Marketing costs remain the same; pricing highly
variable
Industries with digital goods are undergoing
revolutionary changes (publishers, record labels, etc.)

Management Information Systems

Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce: Business and Technology

Types of Electronic Commerce

There are many ways to classify electronic commerce
transactions.
One is by looking at the nature of the participants in the
electronic commerce transaction.
There are three such categories:
Business-to-consumer (B2C)
Business-to-business (B2B)
Consumer-to-consumer (C2C)

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Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce: Business and Technology

Internet business models

Types of business models:
E-tailer
Sells physical products directly to consumers or to
individual businesses. E.g. Amazon,
Transaction broker
Saves users money and time by processing online sales
transactions and generating a fee each time a
transaction occurs. E.g. ETrade.com

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Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce: Business and Technology

Types of business models (Cont):

Market creator:
Provides a digital environment where buyers and sellers
can meet, search for products, display products, and
establish prices for those products. Can serve
consumers or B2B e-commerce, generating revenue
from transaction fees. E.g. eBay
Content provider:
Creates revenue by providing digital content, such as
news, music, photos, or video, over the Web. The
customer may pay to access the content, or revenue
may be generated by selling advertising space. E.g.
iTunes.com

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Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce: Business and Technology

Types of business models (Cont):

Community provider:
Provides an online meeting place where people with similar
interests can communicate and find useful information. E.g.
Facebook, Google+, iVillage, Twitter
Portal
Provides initial point of entry to the Web along with
specialized content and other services. E.g. Yahoo, Google
Service provider:
Provides Web 2.0 applications such as photo sharing,
video sharing, and user-generated content as services.
Provides other services such as online data storage and
backup. e.g. Google Apps, Photobucket.com, Dropbox

Management Information Systems

Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce: Business and Technology

E-COMMERCE MARKETING
The Internet provides marketers with new ways of identifying and
communicating with millions of potential customers at costs far
lower than traditional media, including search engine marketing,
data mining, recommender systems, and targeted e-mail.
Before the Internet, reaching a large audience was very
expensive, and marketers had to focus on attracting the largest
number of consumers with popular hit products, whether music,
Hollywood movies, books, or cars.
Many e-commerce marketing firms use behavioral targeting
techniques to increase the effectiveness of banner, rich media,
and video ads.

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Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce: Business and Technology

E-COMMERCE MARKETING (Cont)

Behavioral targeting refers to tracking the click-streams (history of
clicking behavior) of individuals on thousands of Web sites for the
purpose of understanding their interests and intentions, and exposing
them to advertisements that are uniquely suited to their behavior.

All Web sites collect data on visitor browser activity and store it in a
database. (see Figure 10-3)
They have tools to record information about customers who visit
websites. Such tools include:
Clickstream tracking tools: Collect data on customer activities
at Web sites that are used to create personalized Web pages
Collaborative filtering: Compares customer data to other
customers to make product recommendations

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Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce: Business and Technology

E-commerce
Web sites have
tools to track a
shoppers every
step through an
online store.
Close
examination of
customer
behavior at a
Web site selling
womens clothing
shows what the
store might learn
at each step and
what actions it
could take to
increase sales.

Figure 10.3: Web Site Visitor Tracking

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Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce: Business and Technology

E-COMMERCE MARKETING (Cont)

This information enables firms to understand how well their

Web site is working, create unique personalized Web pages
that display content or ads for products or services of
special interest to each user, improve the customers
experience, and create additional value through a better
understanding of the shopper (see Figure 10-4).
By using personalization technology to modify the Web
pages presented to each customer, marketers achieve
some of the benefits of using individual salespeople at
dramatically lower costs.

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Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce: Business and Technology

Web Site Personalization

Figure 10.4:
Firms can create unique
personalized Web pages
that display content or
ads for products or
services of special
interest to individual
users, improving the
customer experience and
creating additional value.

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Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce: Business and Technology

B2B e-commerce: New efficiencies and relationships

Business-to-business e-commerce refers to the commercial
transactions that occur among business firms.
Increasingly, these transactions are flowing through a variety
of different Internet-enabled mechanisms.

Electronic data interchange (EDI)

Computer-to-computer exchange of standard
transactions such as invoices, purchase orders

Major industries have EDI standards that define structure

and information fields of electronic documents for that
industry

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Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce: Business and Technology

B2B e-commerce: New efficiencies and relationships (Cont)

Electronic data interchange (EDI) (Cont)

Although many organizations still use private networks

for EDI, they are increasingly Web-enabled because
Internet technology provides a much more flexible and
low-cost platform for linking to other firms.
Examples of EDI uses:
Automation of the exchange of documents such as
purchase orders, invoices, and shipping notices.
Firms engaged in just-in-time inventory replenishment
and continuous production use EDI as a system for
continuous replenishment.

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Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce: Business and Technology

Electronic Data Interchange (EDI)

Companies use EDI to automate transactions for B2B e-commerce and continuous
inventory replenishment. Suppliers can automatically send data about shipments to
purchasing firms. The purchasing firms can use EDI to provide production and
inventory requirements and payment data to suppliers.

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Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce: Business and Technology

B2B e-commerce: New efficiencies and relationships (Cont)

Private industrial networks (private exchanges)

Large firm using extranet to link to its suppliers, distributors and
other key business partners
Owned by buyer
Permits sharing of:
Product design and development
Marketing
Production scheduling and inventory management
Unstructured communication (graphics and e-mail)
Example: VWGroupSupply.com, which links the Volkswagen
group and its suppliers

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Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce: Business and Technology

A Private Industrial Network

A private industrial
network, also known
as a private
exchange, links a
firm to its suppliers,
distributors, and
other key business
partners for efficient
supply chain
management and
other collaborative
commerce activities.

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Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce: Business and Technology

B2B e-commerce: New efficiencies and relationships (Cont)

Net marketplaces (e-hubs)

Single market for many buyers and sellers
Industry-owned or owned by independent intermediary
Generate revenue from transaction fees, other services
Use prices established through negotiation, auction, RFQs, or fixed
prices
May focus on direct or indirect goods
May support long-term contract purchasing or short-term spot
purchasing
May serve vertical or horizontal marketplaces
Example: Exostar links trading partners in the aerospace industry

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Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce: Business and Technology

A Net Marketplace

Net marketplaces are online marketplaces where multiple buyers can purchase from
multiple sellers.

Management Information Systems

Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce: Business and Technology

B2B e-commerce: New efficiencies and relationships (Cont)

Exchanges
Independently owned third-party Net marketplaces
Connect thousands of suppliers and buyers for spot
purchasing
Typically provide vertical markets for direct goods for single
industry (food, electronics)
Proliferated during early years of e-commerce; many have
failed
Competitive bidding drove prices down and did not offer
long-term relationships with buyers or services to make
lowering prices worthwhile
e.g. Foodtraders.com.au automates spot purchases among
buyers and sellers in the food industry

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Chapter 10 E-Commerce: Digital Markets, Digital Goods

M-Commerce

M-commerce services and applications

Although m-commerce represents small fraction of total ecommerce transactions, revenue has been steadily growing
Location-based services (e.g. checking train schedules,
locate nearby restaurants, ATMs, gasoline stations etc)

Banking and financial services (e.g. Wireless alerts

about changes in account information)
Wireless Advertising

Games and entertainment (e.g. downloading games,

music, ringtones, movie clips)

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Chapter 10 E-Commerce: Digital Markets, Digital Goods

M-Commerce

Figure 10.9: Global M-commerce Revenue 2010-2016

Mobile e-commerce is the fastest growing type of B2C e-commerce although it

represents only a small part of all e-commerce in 2012.

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Chapter 10 E-Commerce: Digital Markets, Digital Goods

M-Commerce

Limitations in mobiles access of Web information

Data limitations

Small display screens

Wireless portals (mobile portals)
Feature content and services optimized for mobile
devices to steer users to information they are most
likely to need (e.g. mobile version of Google, Yahoo
etc which provide access to various resources such
as news, movies)

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Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce Payment Systems

Types of electronic payment systems

Credit card payment systems

Provide mechanisms for authentication and
transferring money from bank to seller

Digital wallet
Stores credit card and owner identification
information and enters the shoppers name,
credit card number, and shipping information
automatically when invoked to complete a
purchase

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Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce Payment Systems

Accumulated balance digital payment systems

Used for micropayments ($10 or less)

Accumulating debit balance that is paid periodically on credit card

or telephone bills

Stored value payment systems

Enable online payments based on value stored in online digital
account (e.g. PayPal)
Digital checking
Extend functionality of existing checking accounts to be used for
online payments
Electronic billing presentment and payment systems
Paying monthly bills through electronic fund transfers from bank
or credit cards

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Chapter 10 E-Commerce: Digital Markets, Digital Goods

Electronic Commerce Payment Systems

Digital payments systems for m-commerce

Three types of mobile payment systems are available

Use of mobile phones that support stored value
systems charged by credit cards or bank accounts
Use of mobile phones as mobile debit cards (tied to
a personal bank account)
Use of mobile phones as mobile credit cards
Consumers can pay merchants by simply waving the
mobile phone at a merchant payment device that can
accept payments