Week 6 questions

Digital markets.

When you think of the term ‘market’ what comes to mind? I think of physical gatherings and exchange of food, products and service. It is a very sensory and close relationship with the sellers and people.

Question 1

a) What experiences have you had with shopping online? I have had good experiences with the likes of Ebay, Mura boutique, Our botanicals and in general. I have always had reliable service and parcels have always arrived in satisfactory condition.

b) Describe a good experience. Once I ordered some products from Brown Cow tanning and they provided a very fast shipping for their product, a reasonable price and was an ethical business that sold products that were vegan and non evasive to the environment. They individually wrap their products and hand write the order in a card, encouraging you to keep buying from their online site. They included a free product for ordering with them for the first time.

c) What did you like about the online store you used? It was easy to navigate, simplistic layout and attractive fonts and pictures. The buying process only had a few steps to process your purchase and had a reliable feel, where I felt safe leaving card details on the site.

d) Describe a bad experience. I have not had any bad experiences with online stores, there was one site that sold basketball shoes (supposedly meant to be real brands alike: Kobe shoes), they were actually fake branded shoes with very low quality. The site was overloaded with pictures, had a weird layout and did not send verification emails until days later. I actually forwarded them too much money (luckily they refunded) but it was not a standard shopping cart at all.

e) What problems did you have with the online store? Answered above.

f) What features make an online store more appealing? Simplistic layout, design and font. Relevant pictures and easy to operate. Good feedback and forums.

g) What features make an online store less appealing? Confusing layout, difficult shopping cart, poor layout and overall design,

h) Should we expect to see the prices of goods and services rise or fall due to the migration of consumers online?

When a business is based online that generally means there will larger amounts of stock available for consumers thus meaning less fluctuation in prices. Businesses can afford to have a lower price with bundles or large orders, rather than at a physical market stall. Customers who use online services, are able to choose from a variety of sellers, thus prices must be competitive to stay active in sales. Nearly all offline businesses have converted to online businesses so that they can have more sales. Prices will still fluctuate but often decrease online because large amounts of stock being bought by businesses can mean discounts at lower prices for consumers.

Marketplace elements include:
Communications infrastructure
Structured environment
Transaction mechanism

Ease of communication is both a strength and a weakness because of the huge volume of information and excess noise such as SPAM

(Understanding Digital Markets). indicate if you agree with them or not.

Question 2

a) The dispersion of prices (that is, the spread between the lowest and highest price for a particular product) will narrow. I think that initially there will be a low contrast in prices for particular products, once the market for the product expands I expect that larger companies will be able to provide cheaper products than smaller competitors. Once they product match what the small company is providing, prices will have high contrast between those who can produce them cheaply.

b) The importance of brand names will decrease. I disagree, I think there is a genuine link between a brand and a consumer and this is outlined through it’s brand. The brand name must represent the culture of the organisation, a simple name will penetrate the consumer market not just a number.

c) Price competition will make all products cheaper. As they speak about low cost price equilibrium I think that products will become cheaper and cheaper until a wider organisation is able to minimise product producing cost with innovation.

d) Digital markets will become dominated by a handful of mega-sites, like Amazon.com. Initially yes, but the internet is a vast place and I think it has the potential to provide more competition for online stores.

e) How do you think the balance of power between buyer’s and seller’s will change? Buyers obviously have the power to research between stores online. They are prepared to find the best deal and to not buy a product if it is outrageously costed on one site, they will switch to another. Sellers will have more market power if their site is too attract a larger pool of customers.

f) Prices are clustered online. I think that prices will fluctuate between online businesses initially.

g) Online prices are elastic. ( i.e. immune to change up and down with demand). Online prices will not be excluded from price elasticity, the more popular they are the more consumers will exercise their research rights or buy from someone else or at a physical store.

h) Online prices are generally transparent (the extent to which prices for a given product or service are known by buyers in the marketplace.). They will continue to be so.

I have also included some key points below which may help your understanding.

Market characteristics
In any given marketplace, a buyer who is seeking out a particular product or service has to undergo a search to understand the various offerings. Who’s selling what? How do the products of different sellers vary along dimensions such as quality or price? And search takes time, so that there’s a cost incurred by the buyer to discover what is available in the marketplace in any given segment.

Online may also increase or decrease switching costs. It can be expensive for large businesses to compete with say AMAZON, but it may be for smaller niche businesses eg a seller specialising in Classic Car books.

Sources of price dispersion on the Internet

1) The first, and most obvious, source of price dispersion online is product heterogeneity. If the products being compared are different in some way, then it should not be surprising if their prices are also different. You can take this a step further and note that even when the products are physically identical, they are not always good substitutes. For instance, they may be available in different locations or time periods — a bottle of wine in a supermarket is not a perfect substitute for the identical bottle in a fine restaurant. It is easy to extend this kind of argument to goods that are accompanied by different levels of customer service, advertising or even customer awareness. For most purposes, a reasonable approach is to consider product heterogeneity as relating only to the tangible or essential characteristics of the product. These characteristics include differences in the product’s physical characteristics or differences in retailer services that must be consumed with the product(e.g., return policies).

2) Product information used to evaluate homogeneous goods is typically separable from the physical product. Just providing better information on a homogeneous good should not provide a retailer with strategic advantage. It is possible, however, that product information is a useful strategic tool because of substantial search costs or switching costs in Internet markets. Customers may be drawn to a site because of its outstanding product information and then choose to purchase from that site because of the high search costs to find the good (at a potentially lower price) at another site. Offering a compelling shopping experience may also effect competition in Internet markets (Novak, Hoffman, and Yung 1998). Web design may influence consumer purchase behaviour.

3) Awareness: The three critical success factors for conventional retailers are sometimes said to be location, location, and location. Geography largely determines the set of potential customers that know of a store and that make purchases there. Many Internet retailers aggressively purchase premium locations on Internet “portals” and spend hundreds of millions of dollars on advertising through online, print and traditional broadcast media. This suggests that customer awareness may be just as important in online markets as physical real estate is in conventional markets. The importance of awareness can be traced to the high search costs to locate retailers in Internet markets. These search cost result from the sheer volume of information available. At times, searching for retailers online takes the form of the proverbial search for a “needle in a haystack.” While some retailers such as Amazon.com have used strategic marketing and large advertising budgets to develop high brand awareness, it can be difficult to locate other, more obscure, retailers among the millions of Internet sites available online.

4) Product information may also serve as a signal of trust and reliability in online markets. Retailer awareness is, in part, reflected by a Xerox study that found that just 5% of the websites online receive nearly 75% of the hits (Adamic and Huberman 1999). Consumers may be willing to pay a premium to purchase a product from a retailer who they trust in favor of an unknown retailer. Therefore, heterogeneity in retailer trust may lead to price dispersion in online markets.

5) Studies suggest that there are a variety of ways retailers may be able to signal trust in an online world including online communities, reputation systems, consumer reviews, and links from other trusted sites

6) Switching costs on the Internet can also be an incentive or disincentive for a customer to change allegiance to a particular site. For example, switching costs may be created through familiarity with a retailer’s site. Given the differences in interface design among Internet retailers, a customer who was familiar with an Internet retailer’s interface well may face a switching cost when shopping at a new retailer whose interface is unfamiliar. On the other hand if two sites are very similar, the switching cost would be low.

Some competitive features of eCommerce may include

Ubiquity (market space, transaction costs)

Global reach

Universal standards (market entry costs, search costs)



Information density (price transparency, cost transparency, price discrimination)


Key concepts include

Information symmetry

Menu costs

Dynamic pricing


New markets have also emerged for digital products. These include:

Digital goods: for example software delivered over a digital network.

Internet business models (pure-play, clicks-and-mortar)

Communication and community (banner ads, pop-up ads, social networking sites)

Digital content, entertainment, and services (such as podcasting, digital hosting services and syndicators)

The main categories of eCommerce are:

Business-to-consumer (B2C)

Business-to-business (B2B)

Consumer-to-consumer (C2C)

Mobile commerce (m-commerce)

G (Government) can also be substituted for (B) in the categories above. C2B is becoming more common particularly price comparison sites, but there is still a lot of resistance from businesses reluctant to get into price bidding wars.

Business-to-Business Electronic Commerce:

There is an opportunity for new efficiencies and relationships. Examples include:

Electronic data interchange (EDI)


Private industrial networks

Private exchanges

Net marketplaces


M-Commerce Services and Applications

Mobile commerce has been slow to take off in Australia, partly because of high data costs. The introduction of the iPhone and other smart phones will probably see a huge increase in M-Commerce in the new few years. There is an increasing amount of free and commercial content already available to Australian mobile subscribers. In many countries it M-Commerce is regularly used for-

Mobile bill payment

Content and products

Banking and financial services

Wireless advertising

Location-based services

Games and entertainment

Question 3

a) What types of m-commerce services does your cell phone provider offer?

  • Financial services, which includes mobile banking (when customers use their handheld devices to access their accounts and pay their bills) as well as brokerage services, in which stock quotes can be displayed and trading conducted from the same handheld device. EG Commbank, netbank savers
  • Telecommunications, in which service changes, bill payment and account reviews can all be conducted from the same handheld device. EG Telstra contact on #125#
  • Service/retail, as consumers are given the ability to place and pay for orders on-the-fly. EG Scoopon services for travel or service vouchers
  • Information services, which include the delivery of financial news, sports figures and traffic updates to a single mobile device.”sourced from:  (http://searchmobilecomputing.techtarget.com/definition/m-commerce).

b) Which of these services do you use? Commbank, Telstra, Scoopon, Google plus

c) What types of transactions do you perform through your cell phone or other wireless device? Commbank, paypal and ebay services.

d) What types of transactions would you like to perform, but are currently unable to? I generally like to visit sites such as booking.com or certain retail stores online so I know that I have receipts etc.

e) What is your opinion of wireless advertising/mobile marketing? It’s inevitable. It will be the major form of adverts once the rest of the world catches up.

Mobile challenges currently include

Awkwardness of keyboards and screens

Data transfer speeds


Limited memory and power supplies on devices


Electronic Payment Methods

eCommerce payment methods have excluded many potential users from engaging in eCommerce. This situation is improving but it still needs a lot of improvement. Payment methods include:

Digital credit card payment systems – common, but many consumers do not have a credit card. This prompted the introduction of Debit cards (Visa, Mastercard) in recent years

Digital wallet – The digital wallet was first conceived as a method of storing various forms of electronic money (e-cash), but with little popularity of such e-cash services, the digital wallet has evolved into a service that provides internet users with a convenient way to store and use online shopping information. As up to two thirds of purchases are abandoned before final checkout digital wallet technology individual allows searches on a site to be saved.

Micropayment – for very small payments such as fares. The main issue is how to charge the customer, without incurring credit card fees.

Accumulated balance digital payment systems – like a City Link eTag for toll payments.

Stored value payment systems – enables consumers to make instant online payments based on value stored in a digital account.

Digital cash – not common but one good example is Hong Kong’s Octopus card system, which started as a transit payment system and has grown into a widely used electronic cash system.

Peer-to-peer payment systems – Paypal is the best known. PayPal operates in 190 markets, and it manages over 175 million accounts (70 million active accounts)

Digital checking payment systems – Electronic version of a paper check, including date, payee name, payment amount, and signature. Electronic checks (e-checks), currently being tested by several large banks, are meant for paying bills, transferring funds, or any purpose where a paper check is used today. Paypal calls an eCheque a transaction where payment is withdrawn from a user’s bank account rather from a Paypal credit balance or credit card.

Electronic billing presentment and payment systems – Bpay is a good Australian example.

Further research
Chris Anderson, the editor of Wired Magazine, wrote a book called ‘The Long Tail’. Anderson’s theory of ‘The Long Tail’ has been widely acclaimed, but there has also been recent research which questions it’s veracity. Conduct your own research about ‘The Long Tail’, and state your opinion in favour or against the theory. It is also worth reading about Pareto’s Principle, the 80/20 Rule. How do the two relate to each other?
Revision Crossword


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