CHARACTERISTICS OF
ELECTRONIC MARKETS
A Cost-Based Comparison of
Traditional vs. Online Stores
Overview
• Why do consumers buy some items at a retail store and
•
•
•
•
other items online?
Three order fulfillment processes (OFPs)
A buyer-side comparison of traditional retail channels
versus electronic marketplaces
A seller-side comparison of traditional retail channels
versus electronic marketplaces
Other channel differences
Three Order Fulfillment Processes (OFPs)
• Traditional market (retail store) OFP
• OFP with an electronic market
• OFP with an electronic market and an electronic
distribution network
Traditional Order Fulfillment Process
Market
Information
Exchange
Seller 1
Seller 2
Customer
Seller 3
Product Distribution Network
Information
Product
OFP with an Electronic Market
Seller 1
Electronic
Market
Seller 2
Customer
Seller 3
Product Distribution Network
Information
Product
OFP with an Electronic Market and an
Electronic Distribution Network
Seller 1
Seller 2
Electronic
Market and
Distribution
Network*
Seller 3
Information and
Digitized Product
* convergence of marketing, order
processing, distribution, and payments
Customer
Buyer Transaction Costs
• Information search costs
• Product price
• Risk
• Opportunity cost (time)
• Distribution cost
• Sales tax
Buyer Cost Differences
Traditional
Market
Electronic
Market
Search
Price
Risk
Opportunity
Distribution
Lower
Sales Tax
Higher
Seller Side Costs
• Advertising cost
• Overhead cost
• Inventory cost
• Production cost
• Distribution cost
Seller Cost Differences
Traditional
Market
E-Market:
physical
product
E-Market:
digital
product
Advertising
Overhead
Inventory
Production
Lower
Distribution
Higher
Explaining Consumer Behavior in
Electronic Markets
• This analysis takes a simplistic view of consumers as
economic agents whose decisions are driven by a search
for lower transaction costs
• This is useful for explaining a portion of online consumer
behavior, but other, more complex, issues must also be
considered
• What other factors should be considered for explaining
online consumer behavior and identifying differences
between traditional retail stores and online stores?