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 1Producer 2Processor

 Finally adding differential transportation costs Producer 1Producer 2 Processor

 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