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

2. 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

3. 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

4. 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

5. Finally adding differential transportation costs
Processor
Producer 1
Producer 2

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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