Relationship Changes in Digital Economy


Even though we have found support for the idea that there are information, power and organization hierarchies in digital markets, we do not think this should be interpreted as the proof that the Internet did not disrupt the traditional way of doing business. Digital marketing is not reverse marketing, but neither is it traditional marketing.

Porter's contribution (2001) to the debate helps give us simplistic ideas about the irrelevance of differentiation in the new network economy, and refocuses on the importance of making the right strategic choices when facing the relevant economic trade-offs. But these trade-offs are different than before. We need to understand how we can create this uniqueness in the new economic and technological context. What is dangerous from a theoretical and practical standpoint is the risk that we fall in a sterile contraposition between two equally useless views of the Internet economy: "the frictionless idea" and the "business as usual" mind-set.

We also find that Shapiro and Varian gave an invaluable contribution to the study of the information economy rules, but they perhaps focused too much on the information side of the digital economy and overlooked the other side of the economics of mediation: the relationship side. The network economy is an infomediation/content economy, but also a relationship economy. There are new relationship costs and benefits to consider, and new trade-offs to evaluate. A relationship economy perspective could help to explain, for example, why network externalities do not always operate in large communities. Network externalities do not depend on the size of the network in terms of the number of members functionally connected, but on the size of the participating members (Mandelli, 2001; Grewal et al., 2001). We claim that information rules are not enough to guide action in the digital economy, because they stress the importance of forced relationships (lock-ins) in order to build economies of scope, without considering the importance of active and socially rich participation, in order to leverage cooperation economies. Also, information rules do not focus the attention on variables, which we believe is critical in a network economy: social exchanges, with their costs and their benefits. We call for an integration of the study of the content-side of the network economy with the study of its relationship-side, in the complexity of an all-connectable (not necessarily all-connected) world.

The study of the role of brands in the digital economy can help highlight some of the important characteristics of this relationship economy. Branding in traditional marketing is the managerial tool for building differentiation in the relationships with the customers, in order to justify price premiums and build attitudinal and behavioral loyalty (Busacca & Castaldo, 1996; Rust, Zeitham & Pusateri, 2000; Busacca, 2000; Chaudhuri & Holbrook, 2001; Costabile, 2001), in exchange for their role as cognitive selectors (shortcuts) and uncertainty reducers (trust). This "management of complexity" role of brands is built around their ability to offer efficient relevant information during the customer search activity, and constant value (functional and affective) in the relationship experience. The result is a superior economic return for the firm. Brand trust and brand affect jointly determine purchase loyalty and attitudinal loyalty. Purchase loyalty leads to greater market share, and attitudinal loyalty leads to price premium for the brand (Chaudhuri & Holbrook, 2001).

On the Internet, this value-appropriation role of brands is built one-to-one, in terms of micro-segmentation, versioning and dynamic pricing based on the individual value equations of the customers. But value-appropriation cannot forget the value-creation side of relationships. Price discrimination based on the one-to-one perceived value of the same product by different consumers tries to exploit the dynamic adjustment power of the economic web, but it falls short of the most important asset: legitimacy. Value is not an absolute matter. It is dynamic and relational because it is adaptive. When we speak about trust and brands in a digital economy, we do not refer only to the idea that trust and brands can build long-lasting, loyal relationships (Reicheld & Schefter, 2000; Urban, Sultan & Qualls, 2001; Shankar, Smith & Rangaswamy, 2002). We are speaking about the different nature of delegation and selection of variation that works online, compared to the traditional one, and we speak about the legitimacy of this selection following the neo-institutionalist approach (DiMaggio & Powell, 1983). We can consider the so-called "case of dynamic pricing" at Amazon.com. This case is widely used in public relations studies, because it is a good example of how companies on the Internet can easily fall in virtual communication crises. The reason why this crisis exploded would be interesting to examine.

Research indicates that capabilities and resources create competitive advantage when they are valuable, rare, and imperfectly imitable (Barney, 1986). This is the case of brands also in digital markets, but in these more complex and connected environments this competitive leverage must be nurtured with more intelligence, collaboration and transparency. Brands must be more intelligent (because through the learning network with business partners and consumers, they can enrich their cognitive control of the market), and collaborative (because the values associated to the brand must be socially negotiated and mediated by the emergent and self-organized meaning that the periphery assigns to them). Collaborative marketing (Mandelli, 1998) does not mean that brands are not hierarchies anymore. It means that brand hierarchies are different: more legitimated and at the same time more able to cope with complexity.

But brands and trust are not cost-free. If we analyse this in the framework of the economics of mediation, we understand that brands still are valuable intangible resources for firms that they can invest in cognitive economic exchanges. Brands still play the role of signalling trustworthiness, driving customer selection and customer loyalty, which activate the economies of scope at the node level (one-to-one), and therefore generating value for the brand companies. But for their formation they require investments of tangible and intangible capital. Brands are built investing in product quality, quality of communication and quality of customer experience. They are sunk costs for firms.

Also for consumers, brands drive both benefits and costs, both value captured and value invested. For consumers they work as trust-based shortcuts (benefits connected to the reduction of complexity and transaction costs for search and evaluation of different options), value associations (benefits connected to the symbolic area of consumption), but also information and power hierarchy (reduction and sacrifice of diversity).

So there still are brand trade-offs, both for firms and for customers. But these trade-offs are evolutionary and negotiated at a more complex level than before. They are a matter of policy decisions, and policy decisions as we know (Lowi, 1964) are complex outcomes of planned and everyday negotiations in local, culturally and socially embedded policy arenas.

The Internet economy cannot be frictionless, because it is a complex economy and a complex economy lives on delegation (even though not always vertical delegation), which is a form of hierarchy. But hierarchies are not all based on domination and coercion. Selection in a simple and authoritarian environment may be a matter of low transparency or trapping strategies; selection in a complex and connected environment is a matter of delegation and cooperation, and this is true also for brand hierarchies (Figure 3). So the attention moves to the sources, dynamics and results of social delegation and cooperation.

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Figure 3: Efficiency and Legitimacy in Internet Infomediation (Adopted from Mandelli, 2001)




L., Iivonen M. Trust in Knowledge Management Systems in Organizations2004
WarDriving: Drive, Detect, Defend, A Guide to Wireless Security
ISBN: N/A
EAN: 2147483647
Year: 2004
Pages: 143

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