The Effect of E-Commerce on Rural Communities: Manna, Mayhem, or Minutia Charles B. Moss

Three Economic Models Our models of E-Commerce are based on three general strands of literature Models of Market Channels New Institutional Economics Mostly models of Transaction Costs based on Coase Schumpeterian Models of Innovation

General Microeconomic Models In the most general terms, microeconomic models do not explain marketing channels Standard neoclassical models are typically models of efficient frontiers or optimal decisions for a given technology We start from a standard market channel

Under a slightly more complicated formulation, we could have two separate firms supplying inputs used by a processor who sells to the final demand Producer 1 Producer 2 Processor

Finally adding differential transportation costs Processor Producer 1 Producer 2

The introduction of differential transportation costs Decrease overall production moved through the market channel It introduces two transportation cost wedges Increase the relative amount of goods being produced by the second producer The transportation cost wedge is smaller for the second producer One way to think about E-Commerce Innovations is a reduction in transportation costs It makes suppliers farther away (i.e., producer 1) closer This increases their potential market share

Coase’s Theorem The basic economic question is: Why do two firms exist and not one or three? Coase’s answer is was that the boundaries of the firm depend on tradeoffs between Diseconomies of scope – the cost of doing a second, different activity Transaction costs – the implicit loss of finding and contracting with a buyer for the intermediate product Williamson’s extension of Coase’s theorem defines three attributes of transaction cost Asset Specificity – how specializes is your asset base (geographically specialized or economically specialized) Uncertainty – how easy is it to ascertain what the intermediate output is worth? Frequency of Transaction – is the intermediate output traded often

Specialized intermediate outputs with uncertain values and infrequent transactions have high transaction implicit transaction costs These high transaction costs in industrial organization tip the scales toward vertical integration Taking a different tack on Coase’s theorem, these high transaction costs also yield sticky markets or more locally protected markets Defining E-Commerce as a bundle of information technologies, this bundle Decreases the implicit transaction costs by reducing the uncertainty, or Reduces the search cost

Schumpeterian Dynamics The final approach is the creative destruction of Schumpeterian competition In the Schumpeterian model, a winner or innovator wins monopolistic power However, the higher the monopolistic rents generated from the innovation, the more the winner of the last round invites a subsequent innovation The new innovator then replaces the old winner and the cycle starts over again Schumpeterian competition is more of a competition through time

What Do the Three Models Imply? Technological innovation in the bundle of information technologies called E-Commerce implies potential reductions in transportation/transaction costs This should imply a narrowing of the margins through space or an increased competition across geographically dispersed markets However, it may also imply some increased transaction costs Uncertainty in contracting It will invite Schumpeterian competition Areas or enterprises with relatively high profits may be the first to be replaced Higher gains to innovation will invite additional innovation

Original Question: Manna, Mayhem, or Minutia Rural markets that are constrained by transaction or transportation costs will benefit (Manna) Florida’s citrus packaging industry Rural markets that have benefited from informational fixities will be hurt (Mayhem) Local livestock auctions Equipment and parts dealers Rural markets where space yields no specific cost advantages or where transaction costs are relatively small will not be affected (Minutia) Local grocery stores