The economic impact of the Internet is like the oil shock in reverse. The jump in oil prices
during the 1970s increased inflation and pushed the world into recession. However, the
Internet reduces the cost of information. This has positive economic effects, since it makes
it easier for buyers and suppliers to compare prices and eliminate the middlemen between
firms and customers, lowers transaction costs, and reduces entry barriers. Economists have
an interesting argument: the main reason why firms exist is to minimize transaction costs.
These reduced transaction and communication costs can lead to both bigger and smaller
optimal firm sizes. Smaller firms can buy services cheaply from outside, and this reduces
the barriers to entry.
The Internet can link up supply chains, make it easy to place and track orders, and display
specifications at the click of a mouse. Hence few companies are willing to miss out on
the benefits e-commerce offers. So, it is certain that the Internet reduces costs, increases
competition, and improves functioning of the pricing mechanism. The Internet moves the
economy closer to the theory of perfect competition, which assumes abundant information,
zero transaction costs and no entry barriers. Analysts feel markets should become more
efficient as the Internet increases the flow of information between buyers and sellers. This,
in turn, should ensure efficient allocation of scarce resources.
E-commerce increases competitive intensity by allowing business customers to consider
every available alternative to every offering. Suppliers no longer compete with two or three
familiar competitors but with every company in the world that has a web site and a comparable
product or service. E-commerce also undermines traditional sources of advantage based on
asymmetries of information. In the past, sellers derived some advantage by knowing more
than their buyers. Such an advantage came from knowing more about the product, the cost
availability of raw materials and components, and the efficiency of their own manufacturing
processes. Each step in the supply chain had a lock on its own information, which made
each link more defensible but the chain as a whole less efficient.
The Internet does away with much of this privileged access to information, shifting the
competitive emphasis away from secrecy and toward transparency and the absolute comparative
value of the offering. Distribution and sales channels have always conveyed a certain
amount of information back to suppliers. However, bandwidth, precision, ease, speed, and
manageability of the information flowing in both directions are orders of magnitude greater
on the Internet. The interactive exchange of information, design requirements, component
specifications, cost tracking, logistics oversight, service requests and troubleshooting advice
permits an unprecedented level of customization. Competition on this level will necessarily
become the rule.
As B2B e-commerce becomes one of the most profitable applications for the Internet, we
need to understand the implications of the many technological and market changes that will
usher in an entirely new way of doing business. The B2B e-commerce revolution includes
e-procurement, B2B exchanges, and business infrastructure relationships.
E-procurement involves firms selling supplies, equipment, materials, and services with
a streamlined online purchasing function that often eliminates traditional intermediaries,
thereby reducing costs and cycle times while offering greater flexibility and responsiveness
to changes in demand. Web-based supply chain management networks improve coordination
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