Determinants of Market Strategies in Electronic Markets

Electronic markets have opened a new type of market for customers and organizations, and have become a serious alternative to traditional, non-electronic markets. There has been little comparative analysis of these two market types, and the market strategies that are adopted in each. This paper explores the differences between traditional and electronic markets, identifies possible market strategies related to electronic markets, and investigates factors associated with the adoption of these strategies. Our empirical analysis will provide an insight to reasons for adopting different market strategies. Traditional vs. Electronic Markets With the expansion of the Internet, electronic markets have begun to emerge as an alternative forum for business transactions. We define traditional markets as non-Internet markets, where buyers and sellers rely on non-electronic media for market-related activities. These two market types differ in a number of ways. 1. Location constraints and the resulting allocational inefficiency. Traditional markets are constrained by location, which reduces consumer utility [Hoteling 1929]. This constraint does not exist in electronic markets. For consumers who have access to electronic markets, such markets offer allocation efficiency [Bakos 1991]. 2. Product differentiation and customization. Product differentiation is an important –and costly--competitive strategy [Perloff et al.1997]. Electronic markets provide customization opportunities by capturing information about customers and their actions [Choi et al. 1997 Ravindran et al. 1996]. 3. Distribution channels and different roles for intermediaries. Distribution channels and intermediaries play important roles in relationships between buyers and sellers [Gerstner and Hess 1991]. In electronic markets, the traditional intermediaries disappear or change drastically in nature [Benjamin and Wigand 1995; Baily and Bakos 1997]. 4. Degree of price information and cost of searching for the best price. There is a cost associated with searching for the best price. In electronic markets, this cost is lower due to the availability of free information on demand [Bakos 1991]. 5. Types of advertising. Advertising is the modern method of identifying customers and firms [Stigler 1961]. As advertising costs increase, the potential for monopoly pricing increases, which creates market inefficiencies and reduces customers’ welfare [Stahl 1994]. Advertising in electronic markets serves the same purposes as those in traditional markets (providing information, increasing demand, changing the elasticity of demand, creating barriers to entry, and product differentiation [Choi et al. 1997]). However, electronic markets offer novel methods of advertising. Advertising in traditional markets is of the broadcasting type, with little control over who receives the message. In electronic markets, it is possible to target select group of customers and to monitor results more closely (using measures such as hit rate). Furthermore, the pullmethod of advertising offers new possibilities for advertising in electronic markets. Hence, advertising in electronic markets has more customization potential. 6. Extent and type of competition. The cost of search for the best price allows sellers the advantage of the monopolistic pricing and special strategies [Bakos 1991; Varian 1992]. This has been demonstrated in the oligopoly power in the food and tobacco industries [Lopez and Bhuuan 1998]. The reduced search cost in electronic markets increases competition, increases customers’ utility by improving the match between their needs and products, and move the market towards the optimal market allocation [Bakos 1991, 1997]. 7. Size of the potential markets. The global accessibility of electronic markets increases the potential size of this market well beyond traditional markets, and creates more equality of access among sellers of various size and market power. There is a higher degree of cultural, social, and preference diversity in electronic markets, which demands a different business approach to the product design, marketing, and their related business activities.. 8. Access Constraints. Access to electronic markets is constrained by the knowledge of and access to the required technology. These constraints exclude certain types of customers from participating in electronic markets. Furthermore, customers do not have physical access to products in this market, which makes it an inadequate market medium for certain products, and could at best be a supplement to traditional markets.