B2B Games
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B2B GamesAs noted above, in a screening game the less-informed player moves first, effectively creating barriers to entry, while in a signaling game the better-informed player moves first. If quality is known to the seller, but not to the buyer, Internet B2B may take on the characteristics of either type of game. Since these games involve participation in a network, payoffs will be affected by network externalities. An externality is a feature of a product that has no market price, and may be positive or negative (Whinston, Stahl, and Choi, 1997, p. 520). Network externalities correlate the size of the network with expected economic benefit to be gained from joining.
B2B ExternalitiesPositive network externalities may exist where a market maker creates an alternative channel for trading in a more distributed or fragmented environment. For example, The Economist (A Matter of Principals, 2001) describes Enron's efforts to act as a market maker for all sorts of energy, by treating it as a commodity and providing a platform for rapid execution of orders. Malone, Yates, and Benjamin (1987) might find this a clear example of the "electronic brokerage effect" as the number of users of the network grows, the benefits increase for both the market maker and each individual participant. Competitive firms will generally not want consumers to engage in pure price shopping, and will instead try to differentiate their product and services so as to discourage price comparisons (Shapiro and Varian, 1998, p. 79). Limiting opportunities for differentiation creates negative externalities. When the participants are competing suppliers, the expected economic benefit to be gained from joining the network may be lower when the expected network size is larger (Riggins and Mukhopadhyay, 1999). Both private markets and public exchanges may encourage price competition. A public exchange not only allows consumers easy access to prices, it also allows the participants themselves to monitor each other's price movements. If the buyer in a private exchange sets a standard of quality and makes it known to all sellers, pressure on prices is almost inevitable.
Effects on PricesVarian (1999) points out that models in which some consumers search out the lowest price for a generic product while other consumers shop at random generate similar equilibria: sellers manage to charge a relatively high price on average by randomizing their prices to discriminate between searchers and non-searchers. In other words, companies compete for searchers by temporarily lowering prices; those who invest in the search may end up with a lower price, while the probability and magnitude of the discount will, to a degree, determine the propensity to search. Moderating the tendency to search for lower prices in the short term is the fact that overly price-sensitive customers will give up the benefits conferred by loyalty. Expectations of repeat business may discourage efforts to seek a narrow advantage in any particular transaction (Williamson, 1975, p. 107). Global reach may mitigate local negative externalities, by providing a basis for price differentiation between local and foreign markets. The OECD (1998, pp. 86 87) cites research that shows many SMEs are using Internet B2B to open and/or maintain a presence in foreign markets. They raise the possibility that international markets can function as niche markets for start-ups that otherwise face greater competition at home. Once these have a certain brand reputation and expertise, they may then reinforce their position in domestic markets, especially if the domestic market is large.
Private MarketsTraditional EDI clearly fits the definition of a screening game. It is well documented that large companies can and will force smaller suppliers to adopt technology by making participation in the network a precondition for continued business. Indeed, the OECD (1998, p. 52) cites estimates that up to 70% of EDI links are established primarily because a major corporate or government customer specifies doing so as a term of contract. While Malone, Yates, and Benjamin (1987) see the benefit of the "electronic integration effect" as lower transaction costs, this benefit often accrues to the larger partner at the expense of the smaller. Hammer (1990) for example, relates that when Ford moved to a paperless accounting system, some suppliers still printed invoices, but threw them away instead of sending them. If lower transaction costs are the goal, subsidies may be necessary for the network to achieve an acceptable volume of transactions. Riggins and Mukhopadhyay (1999) make a case for differential subsidies, to avoid the "moral hazard" of subsidizing participants who would join without help. Private markets, where suppliers bid on packages of work, are growing in popularity and utility. General Electric began purchasing maintenance materials over the Internet, and realized cost savings in the range of 30 40% (Magaziner, 1998). By 2001, GE was doing more business through this private marketplace than all public exchanges combined (Older, Wiser, Webbier, 2001).
A Screening GameIt makes intuitive sense that pressure to join a private market would be seen as an element of the competitive environment. The element of coercion remains: if you want to do business with the company, you must use this channel. Migrating EDI systems to semi-private networks based on Internet technology will not change the way they are used; it simply lowers one of the hurdles that must be cleared to reach a powerful customer. If barriers to participation are low, there should be a wide variety of value-for-money propositions for the buyer to choose from. Revealing private information is beneficial to consumers with low valuations, while those with higher valuations must be given sufficient incentives to reveal them (Whinston, et. al., 1997, p. 345). Sellers will always provide information about high-cost, high-value products, but will only provide information about lower value products when they can discriminate between buyers (Whinston, et al., 1997, p. 256). By moving first, publicizing product specifications that set a lower bound on quality, the buyer screens out sellers who are unable to meet the minimum quality. More importantly, the buyer screens out sellers who are unwilling to compete on price for products that meet the minimum quality standard.
Public ExchangesGrewal, Comer, and Mehta (2001) study a public exchange for jewelry, where a monthly access fee allows members to buy and/or sell products, which are not, by their nature, commodities. The "open bazaar" environment makes it efficient to exchange information related to price, product specifications, and terms of trade. They conceptualize the nature of participation in terms of three distinct states: exploration, expert, and passive, and distinguish between them by the number of transactions executed in the market and the length of time a firm has been a participant. Firms in the exploration state are "testing the waters," trying to understand the new medium better. In the expert state, firms believe they have been successful in re-engineering their business processes to function effectively in the electronic market. In the passive state, organizations maintain a presence, but carry out virtually no business in the electronic market. Their analysis suggests that the passive state is (1) propagated by firms entering on an experimental basis, including competitive hedging by firms that do not believe public exchanges are viable, but consider them a future opportunity or threat and therefore want to observe and learn; (2) perpetuated by low entry barriers, in that joining requires a commonplace computer and access to the Internet; and (3) reinforced because maintaining a presence is not expensive, requiring a firm simply to pay its monthly subscription fee (Grewal et al., 2001). The argument for the public exchange to have a subscription-based revenue model rather than charging a per-transaction fee is strong. First, a company might establish a relationship with a supplier through a public exchange, and then invite that supplier to migrate to some other channel for their transactions. In this case, the continuing stream of transactions is invisible to the portal, and a business model based on per-transaction revenues would not reflect the value created for the trading partners. Second, what seems to be a market relationship may actually be based on trust and habitual use of the portal. The public exchange may simply be the most efficient channel for two trading partners with a long history of successful transactions. In this case a per-transaction revenue stream could effectively raise, rather than lower, transaction costs for the participants; again, a membership model is favored.
Market PresenceChen (1998) makes a case for "Dual-Acceptance of Adoption" and "Crossed Reciprocal Interdependence" phenomena and the World Wide Web in general. He shows that the rate of adoption of Web clients will depend upon the number (or the utility) of Web servers, not the number of other Web users. Conversely, the rate of adoption of Web servers depends upon the number of users (or the usage), not the number of Web servers. Furthermore, the benefits from each additional adoption increase not only for all future adopters, but also for each previous adopter. However, the initial relationship still holds: the benefits from each additional Web server increase directly for all future and previous Web client (but not server) adopters. Similarly, benefits from client adoption increase directly for all future and previous Web server providers. One conclusion that might be drawn is that as the number of public exchanges increases, it may be advantageous to be a passive participant in more than one. If barriers to entry for server providers are low, and clients are charged on a subscription basis rather than per-transaction, the cost of passive participation may well be calculated on the basis of "serendipitous" transactions that result from a widespread presence in many markets. Reinforcing this view is the fact that search costs increase for the potential customer as the number of portals increases. Maintaining a presence in many markets increases the chance that the firm will be visible to anyone searching a subset of them. A low transaction volume in any particular market could add up to substantial transaction volume for the firm, especially if the portal is actually facilitating transactions executed offline or through other channels.
A Signaling GameBeyond simple cost calculations, the firm's image and reputation and innovative needs make electronic markets look more like a signaling game, especially for passive participants. Grewal et al. (2001) points out that if stakeholders view technologically sophisticated firms more favorably in comparison with technologically naive firms, then by virtue of a firm's entry into an electronic market, it is in a position to assert that it is ready for the challenges of the information age. By extension, organizations that embrace electronic markets to mimic a successful benchmark firm may believe that participation is a critical success factor, or that participation provides a better fit with the modern-day organizational profile. The subscription model itself can be seen as a signal to market participants. The portal studied by Grewal et al. (2000), Polygon, does not enable participating firms to make payments electronically, but it does provide ratings for all participating firms based on their payment history. They report that Polygon has debated moving to a transaction-fee model, but concluded that its neutrality is important for the success of the market. The company believes that by taking a cut of transactions, it may become more interested in making the transaction and compromise its neutrality. In the words of Williamson (1975), "The reputation of a firm for fairness is also a business asset not to be dissipated" (p. 108).
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EAN: 2147483647
Pages: 188