Conclusion

Chapter 13 - The Game of Internet B2B
Managing IT in Government, Business & Communities
by Gerry Gingrich (ed)
Idea Group Publishing 2003

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When quality is known to the seller, but not to the buyer, private markets can be modeled as a screening game, and public exchanges as a signaling game. In a private market, the buyer moves first by revealing acceptable quality. In a public exchange, the seller moves first by publicizing product information.

Lemons Market

In both cases, the situation begins to look conducive to the development of a "lemons market." The lemons market comes about when quality is unknown to the buyer (but not to the seller) and the buyer is averse to the probability of paying a high price for poor quality. In these circumstances the buyer will offer a low price and obtain the product only if it is low quality. The next best outcome is to pay a high price for a good product; but a high price may attract opportunistic sellers with low-quality products (Bierman and Fernandez, 1998, p. 336, c.f. p. 399; Whinston et al., 1997, p. 37, c.f.p. 141).

Electronic markets may foster competition based on price alone, creating potentially significant negative externalities. Public exchanges limit the scope for price differentiation as more customers become seekers. Differentiation becomes equally difficult for participants (client adopters) and the portals themselves (server providers) as their number increases. The private market allows the buyer to screen out products that do not meet a certain standard. The buyer gains from lower transaction costs (as with traditional EDI), and the ability to choose from those that offer the best price; expectations of repeat business will limit opportunistic representations.

When search costs are low, scope for differentiation limited, and information about quality is incomplete or imperfect, the conditions for a lemon's market are fulfilled. But is it inevitable? Is it (in spite of the name) necessarily bad?

Commodities

Commodities are goods that are divisible and fungible. As long as a unit of the product can be divided into indistinguishable sub-units, it can be treated as a commodity. Since there is no scope for product differentiation, competition will be based on unit price for a particular quantity and value-adding services such as just-in-time delivery.

Given the discussion above, empirical evidence would be expected to show success with products treated as commodities in both private markets and public exchanges. Economies of scale should be evident, and innovative bundles of services should entice buyers to pay premium prices. Branding becomes a matter of the image and reputation of the firm for reliability in the fulfillment of transactions, rather than product characteristics. In this case, international differences in language and time should make Internet B2B an efficient marketing and fulfillment channel.

The Nature of Participation

The discussion of public exchanges implies that portals themselves may be treated as commodities by the participants. If this is so, having a critical mass of client firms in the expert state may encourage migration toward them, leaving the mass of server providers with clients in the exploration or passive states (as defined by Grewal et al., 2000). Empirical evidence might show that attaining that critical mass depends on the ability to allay fears about security, assist with process integration, and publicize success stories. On the other hand, it may show that successful portals are simply better at disseminating product information, order entry, and account management (O'Daniel, 2000).

Research along these lines should also focus on the true nature of passive participation. Passive participants deploy the technology, but do not make it a medium for action. There are a number of promising possibilities for research. The initiative might be driven by IT experts in the company without co-opting management and key members of the purchase decision team, for example. Firms may be using the medium simply for advertising, and executing transactions through other channels. A closely related question is reaching participants in the process of making the purchase decision. Do they actually search? Only when switching? Which role is most likely to be scanning the portals for potential business partners?

Facilitators

Branding concerns, shared meaning, and purchase behavior may largely be determined by conventions and rules. Beyond these factors, resource issues should also be investigated. One such issue might be the relationship between use of traditional EDI, participation in Internet B2B, and the growth of internal IT capability. Industry characteristics may have an effect on these relationships as well as the business model of the Internet B2B service provider. Expectations for ROI might also be quantified in terms of transaction costs, risk premiums for switching systems and/or business partners, and the real benefits of system integration.

This has important implications for public policy initiatives that seek to increase participation in Internet B2B through financial subsidies. Financial subsidies to encourage participation in public exchanges become a subsidy to server providers, effectively raising the price on offer. The chance of paying a high price for low quality increases as the number of portals proliferates, and expectations of subsidies may encourage passive participation by firms that have not made the internal commitment to the new business process. Subsidies may be better spent to allay fears about security, assist with process integration, and publicize success stories: in essence, building a brand for Internet B2B itself.

Technology adoption is a risky proposition, even when it is limited to a firm's internal processes. It demands a collective decision to exchange one set of expertise for another, and opportunistic representations are a real danger. Internet B2B is not entirely a special case, except that price competition creates a potential lemons market. On one hand, participation will require clear competitive necessity, economies of scale, and/or potential for market expansion. On the other, assurance will be necessary that the new expertise required by dependence on global networks is reliable enough to avoid greater vulnerability.

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