A Cost-Based Comparison of Traditional vs. Online Stores Characteristics of Electronic Markets

Overview Why do consumers buy some items at a retail store and other items online? Three order fulfillment processes (OFPs) A buyer-side comparison of traditional retail channels versus electronic marketplaces A seller-side comparison of traditional retail channels versus electronic marketplaces Future issues and trends

Three Order Fulfillment Processes (OFPs) Traditional market (retail store) OFP OFP with an electronic market OFP with an electronic market and an electronic distribution network

Traditional Order Fulfillment Process Customer Seller 2 Seller 3 Product Distribution Network Market Information Exchange Information Product Seller 1

OFP with an Electronic Market Seller 1 Customer Seller 2 Seller 3 Product Distribution Network Information Product Electronic Market

OFP with an Electronic Market and an Electronic Distribution Network Seller 1 Customer Seller 2 Seller 3 Information and Digitized Product * convergence of marketing, order processing, distribution, and payments Electronic Market and Distribution Network*

Buyer Transaction Costs Information search costs Product price Risk Opportunity cost (time) Distribution cost Sales tax

Buyer Cost Differences Lower Higher Traditional Electronic Market Market Search Price Risk Opportunity Distribution Sales Tax

Seller Side Costs Advertising cost Overhead cost Inventory cost Production cost Distribution cost

Seller Cost Differences Traditional E-Market: E-Market: Market physical digital product product Advertising Overhead Inventory Production Distribution Lower Higher

Explaining Consumer Behavior in Electronic Markets This analysis takes a simplistic view of consumers as economic agents whose decisions are driven by a search for lower transaction costs This is useful for explaining a portion of online consumer behavior, but other, more complex, issues must also be considered What other factors should be considered for explaining online consumer behavior? How may these factors change in the future?