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This electronic commerce explosion has provided
opportunities and challenges to both Wharton faculty and
alumni. The Wharton Electronic Commerce Forum brings
faculty together to work on these issues. Its director, Eric
Johnson, the David W. Hauck Professor of Marketing, Operations
and Information Management and Psychology, is
studying consumer behavior on the Internet. In addition,
he has looked into whether declining prices on the Internet
will depress profits for companies doing business on the
web as well as their real-world rivals. Gerald Lohse, a
research fellow at the Forum, is examining factors that
make websites effective. Gerald Faulhaber, professor of
public policy and management, is researching the development
of broadband infrastructure for the web.
Stephen J. Kobrin, William H. Wurster Professor of Multinational
Management and director of The Joseph H. Lauder
Institute of Management and International Studies, is doing
research on taxation and regulation of electronic commerce.
Alan Montgomery, assistant professor of marketing, is
studying web usage patterns among Internet users.
Among alumni, the boom in electronic commerce has
launched a number of entrepreneurial endeavors. In addition
to Brownstein, who is helping drive eBay’s growth,
there is Richard Thompson, WG’96, chairman of San Francisco’s
Flycast Communications, a fast-growing agency for
web-based advertising; Jeffrey Hyman, W’90, CEO of Career
Central in Palo Alto, which matches MBAs and software
professionals with jobs; and Farhad Mohit, WG’96, CEO of
Binary Compass, a Los Angeles firm that measures customer
satisfaction on the Internet. Many of these alumni
are research associates with the Wharton Electronic Commerce
Forum.
Lower Prices and More Value
While electronic commerce has created opportunities, it has
also unleashed new uncertainties. Among the most paralyzing
of these for businesses is whether the Internet will drive
prices down so much that profits will disappear. Consider
these scenarios: As more consumers use so-called price robots
to surf the web to locate the lowest air fares, won’t airlines
be forced to keep dropping prices in order to fill the seats?
And as growing numbers of book-lovers buy books online
from Amazon.com, which can sell them less expensively
because it has no stores or inventory to maintain, won’t that
force rivals like Barnes & Noble and Borders to keep lowering
prices in order to remain competitive? And if prices keep
falling, how can anyone make profits off the web?
Johnson's research indicates, however, that several factors
determine companies’ profitability. For starters, price
is hardly the only issue that motivates consumers. “Our
studies show that people care about many more things
than price,” he says. Recognizing this reality, most successful
online merchants don’t just offer prices that are
lower than those found in a real-world store; they also add
value in other ways. For example, the online wine retailer
Virtual Vineyards provides more information about wines
than customers might get in most wine stores. Virtual businesses
also learn their customers' preferences and offer
them choices that actual stores cannot. Amazon.com, for
example, records buyers’ purchases and follows up with recommendations
of other books. Peapod, the Skokie,
Illinois-based online grocer, keeps shoppers’ last three
grocery orders so that they do not have to create a new
shopping list each time. Peapod also allows customers to
sort products on its site by such features as fat, sodium or
cholesterol content.
Another key factor, Johnson argues, is that while the
web may hammer down prices, it also dramatically slashes
costs. And when prices decline, the volume of business generally
increases. So as long as prices are higher than costs,
an increase in volume should lead to profits. A case in point:
online stock trading. As
online brokerages like
E*Trade have emerged,
stockbrokers have witnessed
a sharp decline
in costs per trade from
$400 to $40 to $7.99. But
because orders over the
Internet are placed electronically,
that industry
has also seen transaction
costs plummet. “If trading
volume increases, the
stockbrokers can maintain
their profitability,”
Johnson says. Declining
trading costs generally lead to an increase in trading volume
for two reasons. First, existing customers place more
orders since each transaction costs less; and second, new
customers who were unwilling to trade at higher costs are
drawn into the market.
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