Professional Documents
Culture Documents
Digital Markets
Contents
1. Introduction 1
3. Major Issues/Considerations 4
4. Potential Impact 22
5. Conclusion 27
6. References 28
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Writing Documentation That Works Introduction
Tables
Table 1: Membership and Individual Contribution............................................................................b
Table 2: Human Resources Mismanagement Penalties. .....................................................................b
Table 3: Topics and Teams....................................................................................................................ii
Table 4: Internet Advertising Method................................................................................................ 14
Figures
Figure 1: Percentage of Global Population with Internet Access ...................................................... 2
Figure 2: The E-Business Market Trading Model .............................................................................. 5
Figure 3: Electronic Payment Process .................................................................................................. 6
Figure 4: Percentage of Business with Internet Access..................................................................... 23
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Writing Documentation That Works Introduction
1. Introduction
The role of internet in trading and commercial activities has become dominant
over time. Figure 1 below shows how the percentage of internet users in the world had
been increased in 1995-2000 (Chaffey 2002). The interactive between buyers and
sellers has been transformed from physical to virtual form. Time and distances are no
longer being the barriers or obstacles for buyers and sellers to make a transaction
through the internet. It creates a borderless world that change the way of business
today.
3. Major Issues/Considerations
In this section, we examine six different issues related with electronic markets.
First, we explain the communication infrastructure needed to support the operation of
digital market. Second, we evaluate the effects of digital markets on the price,
particularly about the price elasticity of demand and price dispersion. Third, the effect
of digital market in the switching cost will be described. Fourth, we examine how
digital market affects the marketing strategy as well as the customer relationship
management implemented by the seller. Finally, we analyse the ethical issues in
digital markets
register/offer/sell
E-market
search/select/buy
Customer Merchant
Request
Client Merchant’s
Browser Web Server
Online third-party
computers with links to
multiple payment systems
Credit Cards Bank Accounts Online Buying E-Bill Payment Electronic Cash
VISA Debit cards Payflow Pro CheckFree BillPoint
MasterCard Online banking 1 ClickCharge Paytrust Paypal
Figure 3: Electronic Payment Process
Source: O’Brien 2005
The question is how sellers can offer their products to market place, and how
buyers can search and review offers from sellers. In other words, what types of
communication technologies are needed to form the electronic market infrastructure.
Several researchers, for example Bar (2002), Maes, Guttman, and Moukas (1999,
p.81) argues that basically internet provides infrastructure and channel for the
electronic market. Internet is the “global interconnected network environment”
(Turban et al. 2008, and Strauss, El-Ansary, & Frost 2003). It is a place where buyers
and sellers meet and make business transaction (Bar 2002, p.39). It also makes
exchanging information about product and services become faster (Bar 2002, p.36).
The debate about the internet as the infrastructure of electronic market is
whether internet is only a network-aided commerce, which is to make market process
more efficient rather than essentially a new market process (Bar 2002, p.27). The
improvement that the internet offers is argued similar with any other improvements
done by communication technologies (Bar 2002, p.37). For example the invention of
fax also enables buyers and sellers to exchange information faster. Internet only
makes it more rapidly and possibly more efficient. Thus, there are two reasons behind
this argument; first, in order to be the basic of a new market process, the
improvements done by internet need to be different with what has been done by
previous communication technologies and, second, the improvements represents the
first phase in a new cyclical pattern of the new market (Bar 2002, p.37).
Nevertheless, Bar (2002, p.38) states that internet becomes the communication
technology that underlies the new market process mainly because it develops new
market architecture. The infrastructure of the traditional market is physical (Varadajan
& Yadav 2001, p.296), in where the organizations are brick-mortar, which are purely
physical organizations (Turban et al. 2008). Basically, the physical marketplace can
only be reached by nearby consumers. In contrast, with the internet, the market
infrastructure is no longer physical but network or electronic (Varadajan & Yadav
2001, p.296). The impact, then, electronic markets can serve much larger scale of
sellers and buyers (Varadajan & Yadav 2001, p.296). For example, Kelkoo.com,
founded in 2000, served 8.5 million users from across Europe
(http://www.kelkoo.co.uk/co_4293-corporate-information-company.html).
Hence, we find internet can be defined as a communication technology that
forms a new market process because it does not only create market more efficient, but
because it underlies the new market architecture. Internet has created the new market
infrastructure, which is network. It is different with the physical infrastructure used in
traditional market.
The market that is more efficient may affect to the fall of price, to the narrow
price spread, to the smaller and more frequent price changes and high price elasticity
of demand (Bailey cited in Häring 2003, p.2). The internet reduces the cost of
searching of customers, thus, lessens the bargaining power of sellers in the market,
particularly in setting the price (Janssen & Moraga, 2000, p.2). On the other hand,
suppliers also try to increase profit, which may decrease due to lower cost of
searching, by increasing the level of its product differentiation (Bakos, 1998, p.41).
Thus, in the next parts, we examine the explanation of the effect of the digital market
to the price in digital market will cover price elasticity of demand and price
dispersion.
and Brynjolfsson (2001, p.542) conducted a research using the sample of shopbot
consumers, who were considered as the most-price-sensitive consumers. They found
that the consumers really considered about the brand of retailers, even for the
homogenous product, in this case were books (Smith & Brynjolfsson, 2001, p.542).
There were two reasons behind this finding, which first, the brand might reflect the
non-contractible aspects (i.e. quality) of products, which were not informed well in
the electronic market, for example the shipping time (Smith & Brynjolfsson, 2001,
pp.542,553-555). Second, suppliers tended to differentiate their products and services
from their competitors (Smith & Brynjolfsson, 2001, p.542,556-557). Thus, it
becomes difficult to compare those goods because of their differentiated
characteristics. The demand, furthermore, becomes less sensitive to the price changes.
Despite the increasing number of information provided by the internet, the
asymmetric information among the participants still does exist. The quality of
products and its related services were not well informed through the internet (Ellison
& Ellison, 2004, pp.3). Moreover, sellers had the intention to do that obfuscation in
order to make their consumers less informed of the product then could not compare
the price accurately (Ellison & Ellison, 2004, pp.4,38-40). The motive of sellers
behaving in that way was to avoid direct price competition because they had to cover
relatively high expenses related with the adoption of internet, handling the order
individually and the increasing number of advertising (Ellison & Ellison, 2004,
pp.4,38-40).
digital market, types of switching costs and whether switching costs decline in digital
market.
are costs made by intentional actions of firms and are very common in the
marketplace, such as frequent flyer programs (Chenn & Hitt, 2000, p.136).
uncertainties about products that they want to buy, particularly about the physical
conditions of products since they cannot examine the product physically (Sun, 2006,
p.626). In doing promotion in the digital market, information has become its own
viable product because the physical product has been replaced by the product
information on web site (Allen & Fjermestad, 2001, p.14). On the other hand, sellers
have to answer challenges in providing the information accuracy and reliability about
their products through the internet.
Allen and Fjermestad (2001, p.18) argue that the ‘traditional marketing’ is no
longer effective and tends to be expensive over time. Sellers must initiate and
maintain the relationship with their potential buyers so that they will be able to sell
their products repetitively in the future (Allen & Fjermestad, 2001, p.18). Other
researcher, Sun (2006, p.626) also argues that by using the internet, sellers can give
the signals to buyers who are able to search and learn for further information about
the products.
Sellers can conduct several approaches in promoting their products through the
internet, such as unsolicited advertising, permission marketing, as well as interactive
and targeted advertising (Turban et al. 2008). Unsolicited marketing is a method of
distribution of emails to several potential customers without their request or
permission before (Turban et al. 2008). This type of marketing is including ‘spam’
and ‘pop-up’ advertising (Turban et al. 2008). Permission marketing asked
authorization first from the consumer to receive the online advertising and e-mail
(Turban et al. 2008). Usually the costumer will receive e-mails periodically or
advertising messages with incentives. (Turban et al. 2008). Targeted advertising is
using specific group as the marketing target (Turban et al. 2008). There are many
methods of internet advertising can be used as decribed on following table.
METHOD DESCRIPTION
p.165). Sellers can also use hyperlinks as the effective promotional vehicle (Wehling
1996, p.171).
Electronic markets also give a low cost for suppliers and manufacturers in
engaging direct links with buyers (Nolle, 2007, p.11). It can reduce the promotional
and advertising costs as well as increase the time effectiveness. Some companies who
tried to promote their products and services through internet have some difficulties
when their potential buyers cannot find their web pages. This obstacle may disturb the
company sales target achievement. As the solution, companies can use the promotions
that inform the companies’ web site addresses (Lee, 2003, p.306).
Moreover, there are some opportunities and challenges for companies to sell
their products through internet. Sellers in the electronic market can give more options
of products rather than in the physical market as well as details of product information
(Evans & Wurster, 1999, p.84). Sellers can also design and manage the web site
content so that the potential buyers can make one-stop-shopping and find the product
they need in effective way.
In digital market, product branding will still become the important part in
internet marketing (Allen & Fjermestad, 2001, p.18). Moreover, the new visitors tend
to search the products’ information based on the brands or logo that are familiar to
them (Quelch & Klein, 2006, p.70). It means that most of the customers still rely on
previous experience of buying and using the products (Quelch & Klein, 2006, p.70).
Thus, the trust to the products is the significant factor in buying decision (Quelch &
Klein, 2006, p.70)
In order to introduce product branding, web marketers should be able to utilize
consumer information to produce substantial value for the potential buyers. Taylor
and England (2006, pp.77-85) proposed the better way for web site design. They
introduce two methods of web site design; first, the web site content ranking which
puts the most required website contents higher in web site display, and second, web
site content grouping which gathers the similar web site content in the same place
(Taylor & England, 2006, pp.77-85). For marketing purposes, the main purpose of
this method is to increase the accessibility and prominence of the web site that may
lead to the higher sales of products (Taylor & England, 2006, pp.77-85).
However, promotion in digital market has some limitations. Consumers do not
always give the requested information to the companies through internet marketing
because of the privacy concerns (Allen & Fjemerstad, 2001, p.18). The other
limitation is the cultural issues. If the companies failed to include the cultural
characteristics in doing promotion through the internet in a country, then the adoption
of product knowledge will be slow (Gong, Li, & Stump, 2006, p.69). Another
difficulty in promoting new products is the high switching costs in electronic market.
As examined in the previous sections, the higher the switching costs, the less likely
the customer will move to the new products. Therefore, companies must have the
clear defined objectives which are integrated in the company strategy in doing
promotion through website unless they will hard to achieve the commercial goal of
the website (Tiago et al., 2007, p.138)
Overall, we find that by using the internet in its promotion and marketing
strategy, companies can potentially increase their sales as well as market share. From
buyers’ perspective, they can select the most suitable product as their needs and
preferences.
corporations are able to make customers loyal, these customers will speed up their
profitability compared to the conventional businesses due to less costs to service these
customers (Reicheld & Schefter, cited in Chaffey p.330).
Srinivasan, Anderson, and Ponnavolu (2002, pp.42-45) propose some business
factors (8Cs) that influence the cutomers’ loyalty in the digital market as follow.
(1) Customization. It is the ability of buyers to adapt products and services as well
as transactional environment to individual buyers.
(2) Contact interactivity. This refers to the activities between buyers and sellers
through their websites.
(3) Cultivation. This is the level in which a seller gives the relevant information
and rewards to its buyers with the purpose to lengthen their purchases over
time.
(4) Care. It refers to the positive awareness from a seller to all the stages of
purchasing in order to maintain a long-term customer relationship.
(5) Community. Community means an online community that consists of existing
and potential buyers. In this community, sellers organize, facilitate, and
maintain the information exchange related to the offered products and services
in internet.
(6) Choice. Sellers in the digital market can offer more categories of products and
services rather than in the conventional one.
(7) Convenience. Convenience refers to the level of the buyers’ satisfaction on
using the website due to its user friendly and simplicity.
(8) Character. The attractive display of a website can positively affect the sellers’
image in potential buyers’ view.
According to Strauss, El-Ansary, and Frost (2003), customer relationship
management is the process of relationship of obtaining not only final consumers
(B2C) but also business customers (B2B), maintaining them, and developing these
consumers for long time period. In the digital market, firms use database-driven
websites to apply personalisation and customization technologies. Strauss, El-Ansary,
and Frost (2003) point out that the basic role of the personalisation is to greet
customers’ names once they are online, which is easier than the customization’s role.
Customization is more difficult to implement because it changes the content of a site
in order to match the preferences of a user (Strauss, El-Ansary, & Frost 2003).
Furthermore, Renner (cited in Strauss, El-Ansary, & Frost p.424) states that these
technologies enable firms to increase their profit as they are able to identify their
high-value customers, who buy products more frequently and spend their money
most.
With respect to obtaining consumers, companies can acquire both business
consumers and final consumers through online (i.e. internet) and offline. A call center
is one of the most essential devices used by firms to deal with customers’ matters.
Turban et al. (2008) point out in the digital market, firms can develop a call center to
the more advanced tools, for examples email and automated response, which are
cheaper and faster in answering customers’ questions, disseminating the confirmation
or the information of a product. In the online market, customers’ information will be
transferred to companies’ databases once these customers visit the companies’
websites, which enable companies to determine customers’ similarities and
differences (Strauss, El-Ansary, & Frost 2003). A firm is also able to provide chat
rooms as the part of its customer service in order to attract new customers and to
develop their loyalty so that they can share their experiences in shopping (Turban et
al. 2008). In addition, according to Bickerton, Bickerton, and Pardesi (2000), firms
should include their addresses, maps, phone numbers, and opening hours on the
internet to reach customer easier. In this case, the internet is also able to encourage
offline channels because some customers are probably interested to see products
directly in showrooms (Bickerton, Bickerton, & Pardesi 2000).
As for maintaining customers, firms should focus on knowing the percentage
of customers’ retention and the percentage of customers’ attrition. Strauss, El-Ansary,
and Frost (2003) suggest that in the practice of CRM, firms are better to eliminate
customers who do not repeat to purchase firms’ products in a period of time and focus
on customers who buy their products frequently. Cisco system, Inc., for example
applies Web-to-live contact center and the collaborative whiteboard, which enable
customers to communicate their problems to Cisco’s workers. As a result, Cisco could
increase the customers’ satisfaction and save $340 million in a year (Strauss, El-
Ansary, & Frost 2003).
With regard to developing consumers, customers’ loyalty is essential to
increase corporations’ performance for a long time period (Ghosh 1998, cited in
Strauss, El-Ansary, & Frost p.406). Companies are able to build customers’ loyalty if
they can communicate and collaborate with specific customers continuously to attract
and satisfy them. In addition, customers would have positive image about products
and services offered if they are interested and satisfied with those products and
services in internet. Thus, it may encourage them to buy more frequently.
Overall, we find that applying CRM in electronic market may not earn profit
in corporations’ short term performances (approximately during the first two to three
years). However, organizations should start considering their CRM in digital market,
because it assists them to improve customers’ loyalty which may also result in
improving their profitability for long term.
3.6.1. Privacy
In the way of digital market use, the privacy is the most publicized ethical
issues. Privacy becomes a major concern for both consumers and enterprises in the
digital market. Information about customers can be leaked out in all the processes of
buying goods at e-commerce stores (Tan & Guo, 2005, p.217). Many research
efforts have been devoted to the development of privacy protecting technology (Byun,
Bertino & Li, 2005, p.102). Privacy in particular is a notion that has sparked much
interest and sometimes causes alarms to be raised, especially when reports of privacy
violations are cited in the popular media.
The privacy issues come from the idea to gather the information about buyer
and seller that that will improve relationship between buyer and seller (Medley et al.
1998, p.62). Thus, in the United States, the code of ethics is more focus about privacy,
for example the intentional interception of the electronic communication is prohibited
(McCauley, 1997, pp.110-114). However, some customers loose their personal data
when being collected and used in improper way by companies (Jensen, Potts &
Jensen, 2005, pp.206).
3.6.2. Trust
In the real world, the good relationship between buyers and sellers is
depending on trust (Cazier, Shao & St.Luis, 2006, p.718). Customer’s trust in the e-
marketplace will be fostered by both the market-maker and seller in comparison with
the e-marketplace where trust is built by only the seller who plays a role of a market
maker at the same time (Kim & Ahn, 2005, p.195). Trust is the most simply
consideration when customers decide to interactive with the providers. Trust, in
general, is an important factor in many social interactions, involving uncertainty and
dependency (Einwiller et al., 2000 and Einwiller & Will, cited in Grabner-Krauter,
Kaluscha, 2003 p.784 ). Trust can serve as the instrument to reduce the complexity of
human conduct in situations when people with uncertainty (Luhmann, 1989 cited in
Grabner-Krauter, Kaluscha, 2003 p.784). Lack of trust is one of the most frequently
reasons for consumers who not purchase in electronic market (Grabner-Krauter,
Kaluscha, 2003 p.783).
1999 cited in Yang, Hu & Chen 2005, p.188). In the part of seller, brand-equity,
competitiveness, availability, variety and customization were the elements that
determine the trustworthiness of web seller (Fung & Lee ,1999 cited in Yang, Hu &
Chen 2005, p.188).
3.6.3. Security
Another ethics issues need to be considered internet users is security. Both
customer and seller in digital market will get beneficial from increasing the security
systems and the trust worthy of online companies because trust is a mechanism to
reduce uncertainly and complexity in electronic market (Grabner-kraeuter, 2002,
p.49). In electronic market, it is necessary for security to be able to verify and
identical parties who doing transaction to make sure that nobody can get benefit from
exchange information and to prevent the disruption of service and application (Tan &
Guo, 2005, p.218). However, many questions about actions with the internet ethics
scopes are unanswered because they are difficult to assume that actions unethically.
It is important to e-commerce participants to ensure consumers’ trust. In the
digital market, people must be revealed personal data, credit card code, and any of e-
signature to dealers. According to that reason, many of e-commerce store owners had
decided to create the internet security to protect their clients’ secrets. Internet security
is trivial; integrity, privacy, and personal conduct are controlled primarily by a social
contract (Krull, 1995, pp.12).
4. Potential Impact
The digital market, as discussed earlier, has affected not only the market
dynamic, but also the society, organization and individuals in general level. In this
section, we will present the impact of digital market evolution on the society,
organizations and individuals.
The example of country that provides law is the United States where
regulatory environment is significantly better than in other countries. Inadequate legal
protection was rated high by 11% of respondents, and business laws that cannot
support e-commerce only 8% (Shih, Dedrick & Kreamer, 2005, p.61) In the United
States, the intentional interception of the electronic communication is prohibited
(McCauley, 1997, pp.110-114). By this electronic Act, the clients’ information which
is in the attorneys’ hands should be encrypted by the encryption software (McCauley,
1997, pp.110-114). If the clients’ information is leaked thus endanger people’s
privacy, the lawyer who involves in that prohibited action will be punished under the
code of internet ethic (McCauley, 1997, pp.110-114).
The second impact of electronic market to society is to make market more
competitive. There are several factors that may lead market becoming more
competitive. Firstly, the heterogeneonous consumers, who have different preferences
and needs, in the digital market will enforce supplier to have more variety of
products. Secondly, the lower searching cost for suppliers may help them to identify
the condition of their competitors. Suppliers will find the digital market attractive as
they could use them to reach a wide range of new customers in easier and cost-
effective ways and to find information about their competitors in their market too
(Narin cited in White & Daniel, 2003, p.248). Finally, the lower searching cost for
buyer may also lead to the increase of the competition in the digital market. In
conclusion, the competition in digital market will be more competitive.
Digital markets have brought great potential impacts on the operations of the
organisations. Several corporations are able to obtain advantages through digital
markets, yet, other corporations are difficult or even failed to gain the benefits of
electronic markets (Biswas & Krishnan, 2004, p.681). The ‘technological uncertainty’
of obtaining actual advantages in digital market may negatively affect the behaviour
of prospective members of electronic markets, for example buyers and sellers
(Papazoglou & Ribbers 2006). Buyers and sellers tend to wait before joining in
electronic market systems with the expectation that they will be able to learn from
other organisations’ experiences (Papazoglou & Ribbers 2006).
However, Papazoglou and Ribbers (2006) also explain the essential impacts of
digital market on market structure and efficiency as follow:
1. Cost reduction
Digital market can decrease the cost of gaining information, called searching cost,
about alternative suppliers’ products and prices and the advertising cost to
additional customers. The reduction of this searching cost is more likely to
influence competition since corporations, that act as buyers, are able to obtain
better information about their suppliers’ best prices.
2. Network externalities
Digital markets can generate more value for their members since more businesses
link their interorganizational systems.
3. Switching costs
Substantial investment in digital markets, such as hardware, software, employee
training, and the business process reengineering in the organisations, will
probably become useless once their members make decisions to migrate to other
markets. The higher the switching cost, the more reluctant buyers change their
existing suppliers to new suppliers.
In addition, Lancastre and Lages (2006, pp.774-775) claim electronic markets
have influenced firms’ decision to focus on improving their cooperative relationship
with customers. In digital market environment, firms generate communication and
interaction with their customers more frequently through emails, automated
responses, and chat rooms in order to increase customers’ satisfaction as buyers can
share easily their expectations with sellers (Turban et al. 2008). Corporations will also
be able to create customers’ loyalty through these long term relationships (Strauss, El-
Ansary, & Frost 2003).
Furthermore, Song and Zahedi (2005, p.222) state that corporations, that are
able to enter the electronic market, can decrease their geographical boundaries,
transactions and communication costs by making the names of their products,
transactions, and public relations. These costs can be reduced because corporations
can raise communication’s pace and quality with their potential consumers and
suppliers (Song & Zahedi, 2005, p.222). A publisher in electronic market, for
example, is able to reduce the costs of printing, circulation, inventory, and has better
relationship with the customers than traditional publishers (Song & Zahedi, 2005,
p.222).
Overall, we find that even though the technological uncertainty in this
marketplace may negatively affect potential participants’ behaviour, firms which are
able to adapt in this market are likely to increase their profits. It is because firms can
decrease their searching costs. Electronic markets may support firms to build their
relationship with customers and obtain benefits from network externalities.
The first important factor that most consumers consider to conduct a business
transaction is price. Both in traditional and digital markets, most consumers always
look for the best price, which is the cheapest one. On the other hand, the difference
between traditional and digital markets is the availability of the easy, convenient,
cheap, and fast tool for searching the price offered among multiple sellers. Kumar,
Lang, and Peng (2005, p.88) argue that digital markets have search engines which
offer for the fast access and customized service at no cost, thus they may reduce the
searching cost for consumers. The lower the searching cost for consumers, the lower
the price (Brown & Goolsbee, 2002, p.482). However, as discussed earlier at section
3.2., we find that the lower the searching cost does not necessarily lead to the lower
price because in most cases, sellers try to avoid the direct price competition by
differentiating their products, which then can charge the premium price to consumers.
As the result, the price level the in digital market will not significantly induce
consumers to choose digital market rather than traditional market.
The other important factor that may influence consumers in choosing the best
channel transaction is the security of their personal data. The easy, fast, convenient
and cheap way of transaction may become meaningless when the security is not
assured. Ho (2006, pp.47-48) states that the valuable personalization and security
system are both required to attract consumers to use digital market. Järveläinen and
Puhakainen (2004, p.340) found that consumers prefer to use the traditional market
than the digital one because they do not believe in the lower cost and the accuracy of
the electronic transaction. We find that in most cases, building trust in consumers
particularly in the inexperienced ones is hard to achieve. Thus, we can conclude that
most consumers still prefer the traditional market than the digital market regarding the
security and privacy issues.
In conclusion, despite the benefits offered by the digital market, consumers are
constrained with significant threats, such as higher prices and unsecured transactions.
Hence, it is likely that fewer consumers will use the online market for conducting
business transaction.
5. Conclusion
We find that the electronic market is a new form of marketplace, which usea
the internet as its communication infrastructure. Internet is argued to be the
communication infrastructure mainly because it creates new marketplace architecture.
Second, we conclude that the demand in the electronic market is as not elastic as
expected to the price and the significant price dispersion still occurs. This is mainly
caused by product differentiation. Third, we find that overall, switching costs in the
electronic market do not decline even though the searching cost is likely to decrease.
We also conclude that overall, suppliers and buyers should use internet as a
tool to make transaction because internet will support to reduce searching costs for
consumers and advertising costs for suppliers. Companies prefer to improve their
customer relationship management because they want to create customers loyalty and
to increase corporations’ profitability. Furthermore, ethical issue, such as security,
trust, and privacy can influence consumer to be reluctant to make transactions in the
digital market.
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