The Effect of E-Commerce
on Rural Communities:
Manna, Mayhem, or
Minutia
Charles B. Moss
Three Economic Models

Our models of E-Commerce are based on three general
strands of literature


Models of Market Channels
New Institutional Economics


Mostly models of Transaction Costs based on Coase
Schumpeterian Models of Innovation
General Microeconomic Models

In the most general terms, microeconomic models do not
explain marketing channels


Standard neoclassical models are typically models of efficient
frontiers or optimal decisions for a given technology
We start from a standard market channel
S3  S1  MC2  MC3
S2  S1  MC2
P3
P2
P1
S1

Under a slightly more complicated formulation, we could have
two separate firms supplying inputs used by a processor who
sells to the final demand
Producer 1
Producer 2
Processor
P2
P1
Q1
Q2
QT  Q1  Q2

Finally adding differential transportation costs
Producer 1
Processor
Producer 2
P3
P2
P1
Q1
Q2
QT  Q1  Q2

The introduction of differential transportation costs

Decrease overall production moved through the market channel


Increase the relative amount of goods being produced by the second
producer


It introduces two transportation cost wedges
The transportation cost wedge is smaller for the second producer
One way to think about E-Commerce Innovations is a
reduction in transportation costs


It makes suppliers farther away (i.e., producer 1) closer
This increases their potential market share
Coase’s Theorem

The basic economic question is: Why do two firms exist
and not one or three?

Coase’s answer is was that the boundaries of the firm depend
on tradeoffs between



Diseconomies of scope – the cost of doing a second, different activity
Transaction costs – the implicit loss of finding and contracting with a
buyer for the intermediate product
Williamson’s extension of Coase’s theorem defines three
attributes of transaction cost



Asset Specificity – how specializes is your asset base (geographically
specialized or economically specialized)
Uncertainty – how easy is it to ascertain what the intermediate
output is worth?
Frequency of Transaction – is the intermediate output traded often




Specialized intermediate outputs with uncertain values and
infrequent transactions have high transaction implicit
transaction costs
These high transaction costs in industrial organization tip the
scales toward vertical integration
Taking a different tack on Coase’s theorem, these high
transaction costs also yield sticky markets or more locally
protected markets
Defining E-Commerce as a bundle of information
technologies, this bundle


Decreases the implicit transaction costs by reducing the
uncertainty, or
Reduces the search cost
Schumpeterian Dynamics

The final approach is the creative destruction of
Schumpeterian competition




In the Schumpeterian model, a winner or innovator wins
monopolistic power
However, the higher the monopolistic rents generated from
the innovation, the more the winner of the last round invites a
subsequent innovation
The new innovator then replaces the old winner and the cycle
starts over again
Schumpeterian competition is more of a competition
through time
What Do the Three Models Imply?

Technological innovation in the bundle of information
technologies called E-Commerce implies potential
reductions in transportation/transaction costs


However, it may also imply some increased transaction
costs


This should imply a narrowing of the margins through space or
an increased competition across geographically dispersed
markets
Uncertainty in contracting
It will invite Schumpeterian competition


Areas or enterprises with relatively high profits may be the
first to be replaced
Higher gains to innovation will invite additional innovation
Original Question: Manna, Mayhem, or
Minutia

Rural markets that are constrained by transaction or
transportation costs will benefit (Manna)


Rural markets that have benefited from informational
fixities will be hurt (Mayhem)



Florida’s citrus packaging industry
Local livestock auctions
Equipment and parts dealers
Rural markets where space yields no specific cost
advantages or where transaction costs are relatively small
will not be affected (Minutia)

Local grocery stores