It is interesting to note the ways in which eBusiness is driving down the costs of transactions, as it is relatively easy to check prices (price discovery) and then to transact the deal on-line; of course these are two of the key attractions of eBusiness. These phenomena challenge some of the economists’ key notions about firms. However, with a little consideration, it can be seen that established economics models can deal with eBusiness, it is just that some of the rules of the game have changed.
Participation in many markets is no longer the sole preserve of large firms, which used to be the only organisations that had the necessary resources and know-how. Indeed, eBusiness can lead one can question the need for large firms at all.
Useful insight can be gained from the work of Ronald Coase (1937), which describes transaction costs, arguing that firms exist precisely because these costs were reduced compared with conducting these key tasks in the open market.
“In order to carry out a market transaction it is necessary to discover who it is that one wishes to deal with, to conduct negotiations leading up to a bargain, to draw up the contract, to undertake the inspection needed to make sure that the terms of the contract are being observed, and so on.”
(Coase, R. 19371)
To summarise Coase’s article, these transaction costs are:
1. Search and information costs
Most of us have experience of using services like eBay, Google and Kelkoo to check out prices for a range of goods and services within a few minutes. This simply was not possible before the Internet, and seeking out suppliers, product details and prices would have entailed telephone calls, writing for catalogues or perhaps looking at lists and advertisements in trade magazin ...