Market Structure Impact of IT: Two Debates
The (academic) debate about the impact of IT and, in particular, the Web has been characterized over the years by two dichotomies: markets vs. hierarchies and dis- vs. re-intermediation. Funny to see that the main lines of argument in some cases predate the arrival of the Internet for the public-at-large.
Market vs. Hierarchy
Malone et al. (1987) used and applied transaction cost economics to argue that in-creased use of IT will facilitate a "move-to-the-market". Reduced information and co-ordination cost, better possibilities of product representation, standardization effects etc. will give market-like coordination a comparative cost advantage over hierarchical coordination.
This argument has been challenged in the following years by a number of authors which have added further factors that need to be considered such as non-contractible issues, e.g. quality and trust, relationship-specific in-vestments, small number bargaining, product attributes, and demand and technological uncertainty.
Consequently one might hypothesize for a move-to-the-middle, i.e. a growing importance of network relations. In addition, and in partial contrast to the predominantly economic reasoning some argue that the coordination form chosen by companies is less the result of transaction cost assessment but rather the result of strategic decisions.
Dis- vs. Reintermediation
As the Web has brought a much wider and faster proliferation of E-Commerce than many of the protagonists have anticipated, the focus of debate has shifted somewhat from the issue market vs. hierarchy to the question of dis- vs. rei-ntermediation
The Disintermediation Thesis
Benjamin and Wigand (1995) have hypothesized effects of the proliferation of the Web on the restructuring and redistribution of profits among the stakeholders along value chains. While the consumers are likely to benefit from extended information and reduced prices, intermediaries are facing the risk of being bypassed by suppliers who try to capture the opportunity of (re )establishing an electronic direct sales channel and to reduce sales commissions (disintermediation).
The Rebuttal: Cybermediation
Based on transaction cost comparisons, Sarkar et al. (1995) argue that although the Web apparently has lowered transaction costs of the disintermediated transaction, a number of factors in the emerging electronic marketplace have contributed to making intermediated transactions an attractive option where:
tcSC < tcSI + tcIC
(the cost of supplier-customer transactions (tcSC) are lower than the sum of supplier-intermediary (tcSI ) and intermediary-customer (tcIC) transactions).
Sarkar et al. give another, perhaps even more important, argument by asserting that intermediaries must not be seen as pure transaction cost minimizing actors. They often add value to transactions by providing distinctive services. Many new intermediaries provide services enabled and leveraged by the possibilities of the Internet or the Web. With the proliferation of the Internet, such actors have emerged by offering services which quickly respond to the requirements of the electronic marketspace. These new actors are often termed cybermediaries, intermediaries in cyberspace. By negotiating favorable deals, bundling and pooling services on the supply side and demand on the other side, cybermediaries achieve cost advantages for intermediated transactions.
The Synthesis: Combining Intermediation Options
The main lesson from the ongoing debate is that there is no deterministic, transaction cost based mechanism driving intermediaries out of the market. While, on the one hand, transaction costs put pressure on some traditional intermediaries and may lead to disintermediation, new business models evolve, on the other hand, providing rich opportunities for re- and cybermediation.
Literature
Benjamin, R. & Wigand, R. (1995). Electronic markets and virtual value chains on the information superhighway. Sloan Management Review, 36 (1), Winter, 62-72.
Malone, T. W.; Yates, J.; Benjamin, R. I. (1987). “Electronic Markets and Electronic Hierarchies.“ In Communications of the ACM, 30 (6), 1987, 484-497.
Sarkar, M.; Butler, B.; Steinfield, C. (1995): Intermediaries and Cybermediaries: A continuing role for mediating players in Electronic Markets, in: Journal of Computer Mediated Communication (JCMC), Vol. 1, Nr. 3