beyond pt 0 23/1

Box 2.2
Frictionless commerce?
There have been many claims that the Internet represents a new ’frictionless market’.
These claims have until now been largely based in theory, with little or no empirical
evidence to substantiate the claims.
However, research released in August 1999 by Erik Brynjolfsson and Michael Smith at
the MIT Sloan School of Management has produced evidence suggesting that prices
for goods sold via the Internet are lower than at conventional outlets.
The MIT study compiled a data set of over 8 500 price observations collected over a
period of 15 months, comparing pricing behaviour at 41 Internet and conventional
retail outlets. It found that prices for books and CDs sold on the Internet average
9–16 per cent less than identical items sold through conventional channels.
The conclusions of the MIT study have had a major bearing on the modelling
exercise conducted in this pilot study. While all Industry Reference Group members
agreed that the reduced friction of Internet commerce would indeed reduce prices,
identifying the extent to which it would reduce prices proved problematic.
The results of the MIT study were therefore used as a benchmark against the
observations of the Industry Reference Group to ensure that the direct impacts
introduced to the model were in line with the most up-to-date analysis in this area.
Source:
The Allen Consulting Group.
Evaluation of the economic implications of greater use of e-commerce
requires understanding about developments within and between
industries. A review of key industry impacts is conducted in
following chapters.
When discussing productivity and commerce with less friction, the
tendency is to focus upon business efficiencies. Closer inspection reveals
that there is another party—the consumer—in every transaction that is
also concerned about ease, convenience and efficiency. Reducing
consumers’ transaction costs leads to efficiencies that free up resources
(i.e. time) that can be used elsewhere.
2.2 Changes in competitiveness
With the Internet, businesses have greater scope to advertise and sell their
products into a global market at lower cost. This is an opportunity that
even small and medium sized businesses are taking advantage of already.
Of course, Australia also becomes a market that is more accessible to
foreign businesses.
2.3 New products and ways of doing things
It is likely that the impact of e-commerce will be magnified many times
over when changes in capacity are reflected in completely new products
and services. The impact of new products is particularly difficult to assess.
It is possible that the future development of innovations based around
greater use of e-commerce will follow the ‘reverse product cycle’ of
innovation in services. In the initial phase, incremental process
innovations increase efficiency. In the second phase, more radical
innovations lead to substantial improvements in quality. In the third,
product rather than process innovations become important. It takes until
this third stage for new industries and products to become dominant.
While all three phases may become operational in the time frame under
analysis in this study, the most significant new products are to be expected
only in the more distant future. The main focus of the quantitative
modelling to be introduced later will be upon the efficiency gains
characteristic of the first phase.
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