The Effects of Business-to-Business E-Commerce on Transaction Costs: Description, Examples, and Implications
In this paper, we study the changes in transaction costs from the introduction of the Internet in transactions between firms (i.e., business-to-business (B2B) e-commerce). We begin with a conceptual framework to organize the changes in transaction costs that are likely to result when a transaction is transferred from a physical marketplace to an Internet-based one. Following Milgrom and Roberts (1992), we differentiate between the impact on coordination costs and motivation costs. We argue that it is likely that B2B e-commerce reduces coordination costs / increase efficiency. We classify these efficiencies into three broad categories – (1) process improvements; (2) marketplace benefits; and (3) indirect improvements. At the same time, B2B e-commerce affects motivation costs. In particular, we discuss the impact of the introduction of e-commerce on informational asymmetries. Second, we present some early examples of such effects from three companies from which we have been able to obtain data. We measure the process improvements for all three companies. We measure marketplace benefits for one company. We then attempt to measure motivation costs for one company by comparing the performance of an Internet marketplace to a physical marketplace. We are able to document potentially large process improvements. We document one example of large marketplace benefits. We find mixed evidence of motivation costs.