ELECTRONIC COMMERCE

Electronic commerce, e-commerce or ecommerce consists primarily of the distributing, buying, selling, marketing, and servicing of products or services over electronic systems such as the Internet and other computer networks. The information technology industry might see it as an electronic business application aimed at commercial transactions. It can involve electronic funds transfer, supply chain management, e-marketing, online marketing, online transaction processing, electronic data interchange, automated inventory management systems, and automated data–collection systems. It typically uses electronic communications technology such as the Internet, extranets, e-mail, Ebooks, databases, and mobile phones. (Electronic commerce, n.d.)

It is fitting that this entry begins with the definition of e-commerce from a free encyclopedia, self-described as "the largest encyclopedia in history, in terms of both breadth and depth," entirely created by the voluntary contributions of the Internet community—for that is a very good indication of the revolutionary basis upon which e-commerce has thrived. The entry on e-commerce in the previous edition of this work also began with a quote, but one in which it was seen more as a promise than a reality: "No single force embodies our electronic transformation more than the evolving medium known as the Internet. Internet technology is having a profound effect on the global trade in services" ("The U.S. Government's Framework," 1997). At that time Forrester Research, a market research company, estimated that e-commerce would increase to __BODY__,444 trillion by 2003. In reality, e-commerce in the United States totaled __BODY__,679 trillion in 2003, having met that earlier forecast several years ahead of schedule (see Figure 1).

And e-commerce, which encompasses both business to business (B2B) and business to consumer (B2C), is no longer a purely U.S. phenomenon. For example, Internet sales in the United Kingdom in 2004 totaled £71.1 billion in 2004, an increase of 81 percent from 2003, while purchases by consumers totaled £18.1 billion in 2004, a tripling in three years. On the other hand, the European Union had notably less e-commerce activity, when one excludes the United Kingdom. Thus contrast the thriving business to consumer growth in the United Kingdom and the United States with the astonishingly low numbers in the first quarter of 2003—in France of just 75 million euros and in Spain of a mere 40 million euros. Obviously the story of e-commerce is one of mixed success, which indicates that the barriers to its growth are no longer technological, but the economic, legal, social, and perhaps even cultural infrastructure needed to support it.

As this illustrates, the basis of e-commerce is the extraordinary power of the Internet as a transformative force not just on business and the economy, but of the human imagination itself. It serves not just as a medium for the communication of information, but for bringing together like-minded people with a degree of transparency and economy never contemplated before. The above works on the assumption that many heads are better than one: that information that is aggregated through evolution is more than the sum of its parts. The same is true of e-commerce. At its most basic, e-commerce is simply an "electronic storefront" that replicates the printed catalog of the pre–Internet age. At its most innovative, though, e-commerce makes full use of the power of the Internet to create a unique type of commerce that has never existed before.

The quintessential example of the latter is eBay (http://www.ebay.com), which began, as its name suggests, as an online extension of the familiar American tradition of the garage sale. But it rapidly grew to become an institution because of the realization that this was a mechanism for people with even the most esoteric tastes to meet and exchange with each other for profit in a way that was not feasible, let alone economic, before. Today it is the site of choice for anyone looking for the most unlikely of items that previously could be found only by searching through obscure shops. But eBay is far more than a boon for collectors, as it exploits a key driver of e-commerce: the economic externality of the network effect.

NETWORK EFFECT

When a good or service possesses a network effect, then its value to a consumer depends on the number of other consumers who also purchase that item. Indeed, Metcalfe's law states that the total value of a good or service that possesses a network effect is roughly proportional to the square of the number of customers already owning that good or using that service. When eBay brings together potential consumers for one product, then they also serve as a potential market for other products. One consequence of this effect is that there is a tendency for a natural monopoly to be created, with anyone wishing to auction a product having little to gain and a lot to lose from going to an auction site other than the one with the most customers. EBay is now widely used by large businesses for B2B, as well as by auction houses for rare art and such high-value items as automobiles, boats, and even real estate, a far cry from its garage-sale origins.

Many dot-coms during the Internet boom of the 1990s claimed to be exploiting network effects, even to the extent of sacrificing current profits in order to buy the "eyeballs" needed to reach a critical mass of users. While much of that turned out to be illusory, there is little doubt that network effects are a fundamental driver of e-commerce, taking advantage of the Internet's abolition of time and distance to bring together large numbers of customers in one place. Sites such as Amazon.com take that effect into account when they use buyer recommendations as the selling point for their products. Allowing for the inclusion of such comments creates an online community in which potential buyers and owners can compare experiences. Similar practices are used to police buyers and sellers on eBay, or to rank the integrity of sites and products on epinions.com, illustrating again the tremendous variety of the Internet when driving commerce.

A MAINSTAY OF THE ECONOMY

As e-commerce has matured and become ubiquitous, it has attracted attention as a mainstay of the economy rather than as a novelty. Thus e-commerce sales are watched as closely as in-store sales for the health of the retail economy, with the traditional "black Friday" (the day after Thanksgiving) sales being followed by the "black Monday" the following week when workers allegedly use their office Internet connections to do their holiday shopping

online. Moreover, e-commerce is now the subject of extensive academic research, which is archival rather than speculative as it was in the late 1990s.

One of the most interesting findings of this research is that relating to why consumers buy books from Amazon. Professor Erik Brynjolfsson of the Massachusetts Institute of Technology has shown that the reason is not predominantly lower prices. Rather it is the variety of books that Amazon sells, especially of hard-to-find titles that dwarf on all dimensions what can be found at even the largest brick-and-mortar bookstore. "[Consumers] got about 10 times as much value from the selection as they got from the lower prices and competition.… more value was created from the increased choice and selection," said Professor Brynjolfsson (quoted in Postel, 2004, p. C11).

In other words, value comes not just from the lower prices that more transparent competition allows on the Internet, but from the combination of greater choice and easy searching. These effects, Internet-based versions of economies of scale and scope, undoubtedly exist for many other e-commerce applications, from business-to-business marketplaces to online recruiting, music downloads, and even Internet dating. Evidently the dot-com collapse in 2000 has fulfilled its Darwinian purpose in winnowing out from e-commerce those firms that had no coherent business plan for the Internet, leaving behind firms that have a compelling logic in being online.

B2B E-COMMERCE

Although this discussion has focused thus far on examples from B2C, businesses are some of the most highly valued users of eBay and even Amazon. It needs to be kept in mind that B2B is really where all the action is, even if it does not receive the publicity of B2C. In 2003, 94.3 percent of all e-commerce activity in the United States was B2B, with a figure of 75 percent for the United Kingdom in 2004.

Businesses have found the Internet the ideal platform for conducting supply-chain management, fostering competition in suppliers, and reaching their sophisticated business buyers. This is especially the case since in today's economy what firms are mainly selling to each other is information, not just in the case of services such as banking and digital applications, but even when the product concerned is a physical product; the real value added comes from optimizing price and specification, as opposed to the physical transfer of the product. That is the role of the huge B2B marketplaces created by large companies, or even entire industries, which can be roughly described as eBay's for businesses (indeed, many firms have simply outsourced to eBay itself).

ELECTRONIC COMMERCE

NETWORK EFFECT

A MAINSTAY OF THE ECONOMY

B2B E-COMMERCE

BIBLIOGRAPHY