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Introduction to E-Business - Management and Strategy

Introduction to E-Business - Management and Strategy

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Published by Summia Saleem
Introduction to E-Business - Management and Strategy
Introduction to E-Business - Management and Strategy

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Published by: Summia Saleem on Dec 10, 2011
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Transaction costs are the costs incurred in using the market system

for buying and selling goods and services. Transaction costs include

the costs of locating suppliers or customers and negotiating trans-

actions with them. Firms engaged in e-business have been able

to reduce the transaction costs at one or more stages of the buying

and selling process. The key issue addressed by transaction costs

theory focuses on why firms internalise transactions that might

otherwise be conducted in markets. Ronald Coase (1937) pioneered

the concept of transaction costs and it was further developed by

Williamson (1975, 1979, 1983) in an effort to understand the reasons

for firms internalising transactions that are normally transacted

within the marketplace. There are six types of transaction costs.

Search costs

These are the costs associated with buyers and sellers finding each

other in the marketplace. The sheer number and diversity of goods

and services available in the modern marketplace can make the cost

of searching for them quite considerable. The internet provides a

quick, efficient and cost-effective way of searching for products

using search engines such as Google, Netscape and Lycos. Suppliers

can advertise their goods or services on websites or through banner


Introduction to E-business

Chapter 4

advertising. For more precise targeting of buyers they can access

buyer groups, develop and utilise customer relationship management

systems, and pursue permission marketing where the buyers permit

the channelling of product information to them via their PC or

mobile phone.

Information costs

This is the cost incurred by buyers of gaining market knowledge on

the price, quantity, quality, availability and characteristics of goods

and services offered by sellers. For sellers, information costs are

incurred through the process of learning about the financial

condition and need characteristics of buyers. Many e-businesses

have reduced this transaction cost by providing up-to-date product

information on their website for potential customers to access.

Bargaining costs

This is the cost incurred by buyers and sellers when negotiating a

contract for a transaction to take place. This may include the cost of

using equipment to contact and communicate with the other party to

the transaction, the marketing of information, and the legal costs of

drawing up contracts. E-mail has become a cheap and effective way of

communication between buyers and sellers. There are now many

websites offering goods and services where the whole transaction

can be completed online. Auction site e-Bay is a prime example of

an e-business model based on the quick and efficient completion of

transactions online.

Decision costs

The buyer incurs a cost of comparing prices in the marketplace

and ensuring that the goods or services match needs. For suppliers

the decision costs are incurred when deciding whom to sell to

or whether to refrain from selling. E-businesses can speed up

the evaluation process by specialising in providing price informa-

tion on a wide range of goods and services provided by many

competing firms.

Chapter 4

E-business economics


Policing costs

These are the costs incurred by buyers and sellers ensuring that the

goods or services provided and bought match the terms under which

the transaction was negotiated and contracted for.

Enforcement costs

These are the costs incurred by buyers or sellers in the event that the

terms of the negotiated contract are not met.

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