New Methods of

n New Methods of Competing in the Global Marketplace
To understand these changes at a more fundamental level, it would be good for the
reader to understand two concepts, one related to economics and the other related
to consumer information. 33 The first is a type of expense called a “transaction cost.”
The second concept we will discuss is that of “information symmetry” and “information
asymmetry.”
Transaction costs are the costs of doing business that do not actually add value
to a product or service, but must be paid by the business nonetheless. For example,
paying brokerage fees is a transaction cost. Driving to the store to buy an item
involves transaction costs when you consider the gas needed to drive your car to the
store. The further away the store is, the higher the transaction costs. Jokes have been
made about frugal consumers who drive endless miles to multiple stores, just to save
several cents on an item. The problem is that they do not consider the transaction
costs of driving around, nor the price on their time, which is also important. For a
business, a transaction cost could be the startup cost paid to use a certain vendor,
or the one-time costs needed to begin selling your product to another business. In
a sense, transaction costs may be viewed as the number of “touches” a product or
service passes through on its way to the customer.
So where does the Internet factor into all of this? In short, it has helped to
reduce transaction costs. Consider the example of driving around town comparing
prices on a new outdoor grill. With the Internet, driving around is no longer necessary
because prices can be compared by researching online. Hence, the “drivingaround
transaction cost” has been eliminated. Now consider what happens when
all businesses and consumers use the Internet for researching and shopping — the
net effect is a reduction in transaction costs, which is a good thing for consumers,
but at the same time, it intensifies competition in an industry. When competition
intensifies, businesses need to evaluate all of their expenditures carefully. One area
is the old “make or buy” decision. Should our company make the product, or buy
it? Assuming that quality is the same whether we make or buy (economists like to
make those kinds of assumptions), the final decision will most likely be made on
how much it costs to make the item. If it costs more to make the item, then we
outsource it. If it costs less to make the item, then we make it.
It is not difficult to see what the trend is in our business environment today —
to outsource the making of that product whenever it results in a cost savings. From
an organizational structure perspective, this means companies are getting smaller
by laying off production employees so the same product they used to make can be
manufactured somewhere else (usually overseas), where costs are lower, usually due
to cheaper labor. To summarize, the Internet lowers transaction costs, which accelerates
competition, which causes the production jobs to go overseas. Of course, this
is a very simplistic (and yet realistic) scenario, and it should be qualified by saying
the pressure on low prices is also influenced by global competition.
Now, on to the information symmetry/asymmetry discussion. Again, these
terms sound daunting, but the concepts are really quite simple. The basic idea
revolves around the availability of information to the parties in a business