Editorial Introduction
Special Issue: Economics of Electronic Commerce
Markets can yield significant economic benefits by improving transaction efficiency, but effective design is necessary to achieve these benefits. We compare a physical market to a discrete electronic market in the wholesale used vehicle industry to evaluate how their different designs work for different types of transactions. We find that buyers and sellers balance adverse selection costs and other transaction costs when using the two markets, with the physical market serving as the general exchange and the electronic market serving as a spot market for vehicles with low adverse selection risk. These findings increase our understanding of how sellers and buyers distribute supply and demand between physical and electronic markets in industries in which they coexist. They also increase our understanding of how information technology can improve market function in wholesale environments.
New e-markets try in a number of ways to attract a critical mass of participation and usage. Two innovative, all-electronic options exchanges, the International Securities Exchange (ISE) and the Boston Options Exchange (BOX), opened for trading in 2000 and 2004. In contrast to rival floor markets, they offer immediate order execution, direct user access, and reduced costs. As a result, ISE and BOX grew trading volumes and won market share from four incumbent exchanges in the United States. We observe significant differences between broker order-routing practices across ISE and BOX, leading to the markets' different growth patterns. We develop and test hypotheses about new market growth using a panel of six years of quarterly disclosures from 24 major brokerage firms. We find that membership affiliations are the dominant force in predicting brokers' order-routing patterns. In contrast to prior research, network externalities, as measured by an exchange's previous quarter market share, are not significant predictors after controlling for temporal heterogeneity. From our results, executives of new electronic exchanges should concentrate on developing broker exchange affiliation and incentive schemes in order to achieve sustainable order levels. Furthermore, keeping a keen eye on the competitive landscape and reacting to changes in current and prospective competitors' affiliation structures may prove the most beneficial way to ensure continued success. Top management must identify the relative advantages of new entrants' affiliation structures and respond accordingly. A new entrant that provides incentives through a novel affiliation structure can be routed significant orders if the incumbent exchange does not react swiftly and effectively. The results are not limited to analyzing electronic exchanges but, we expect, to many situations where competing information technology platforms also benefit from user affiliation and network effects.
Pay-per-bid auctions require all bidders to pay for every bid. However, paying bidding fees without receiving the auction item in return often causes high dissatisfaction among losers, resulting in heated discussions and high churn rates. To reduce these negative reactions, pay-per-bid auctioneers created the Buy-Now feature, which allows losers to put all or part of the bidding fees that they paid during an auction toward buying the auction item. Using unique data, including individual customer bidding histories and cost data from more than 6,800 pay-per-bid auctions, we find that, overall, the Buy-Now feature leads to more aggressive bidding behavior, attracts more bidders, increases loyalty, and results in a higher profit per auction. However, for voucher auctions that represent common value auctions, the Buy-Now feature causes a decrease in the number of bidders and the profit per auction, although we find an increase in the average number of bids per bidder. We also show theoretically that a bidder can pursue a risk-free bidding strategy. However, we find empirically that bidders rarely use this strategy.
Customized bundling retail strategies have become increasingly popular online. In customized bundling, consumers decide the bundle's components, and the effects of this change on consumption variety have important implications for information goods retailers. Although reduction in transaction and search costs increases supply-side product variety, customized bundling can introduce new types of friction in the consumption process. We show that customization of information good bundles reduces consumption variety through two effects: design cost effects and compromise effects. We present the results of three behavioral experiments and an empirical study using sales data from a national music retailer. This study contributes to the theoretical understanding of the effects of customized bundling on search costs and demand-side dynamics. The results provide insights for information goods retailers on the effects of design and search costs on consumer purchasing behavior. Implications for the design of retail platforms for customizable information goods are discussed.
Mobile applications markets with app stores have introduced a new approach to define and sell software applications with access to a large body of heterogeneous consumer population. This research examines key seller- and app-level characteristics that impact success in an app store market. We tracked individual apps and their presence in the top-grossing 300 chart in Apple's App Store and examined how factors at different levels affect the apps' survival in the top 300 chart. We used a generalized hierarchical modeling approach to measure sales performance, and confirmed the results with the use of a hazard model and a count regression model. We find that broadening app offerings across multiple categories is a key determinant that contributes to a higher probability of survival in the top charts. App-level attributes such as free app offers, high initial ranks, investment in less-popular (less-competitive) categories, continuous quality updates, and high-volume and high-user review scores have positive effects on apps' sustainability. In general, each diversification decision across a category results in an approximately 15 percent increase in the presence of an app in the top charts. Survival rates for free apps are up to two times more than that for paid apps. Quality (feature) updates to apps can contribute up to a threefold improvement in survival rate as well. A key implication of the results of this study is that sellers must utilize the natural segmentation in consumer tastes offered by the different categories to improve sales performance.
While profitable business models elude many virtual worlds, sales of virtual products are a potentially lucrative source of revenue. One new addition to this strategy is virtual gifting, whereby users purchase virtual products to give to other users. The monetary value of such virtual good transactions is economically significant but no prior study has examined this phenomenon in a strictly virtual context. We apply theory from the economics literature to examine gifting behavior in a virtual world in which users' social status is reflected in observable social connections (friendships) and interactions (personal messages). We find strong evidence that gifting is associated with future enhancements of the gift giver's social status, consistent with a social status-seeking motivation, thus confirming a theorized behavior that is difficult to study in the real world. Our study has implications for system proprietors and managers because we show that gift giving increases system use continuance. We identify various antecedents of gift giving, which may assist a manager in identifying users who are most inclined to give gifts and enable the manager to signal the social exchange benefits to users as a way of improving their social connections.
The objective of our paper is to determine the effect of piracy advice from various sources on the behavior of the music consumer. Specifically, does it matter if the source of advice has a stake in the outcome of the piracy decision? Does it matter if the source of advice has a social tie with the advisee? Accordingly, we conduct a laboratory experiment using teenagers and their parents as subjects, increasing the realism of the context by sampling potential pirates and their parents. Treatments represent various sources of piracy advice (e.g., the teen's parent, a record label, or an external regulator). Subjects make decisions playing our new experimental game—The Piracy Game—extended from the volunteer's dilemma literature. Interestingly, subjects respond negatively to advice from record labels over time, purchasing fewer songs as compared to other sources such as the subject's parent. The existence of a social tie between the adviser and the subject assists in mitigating piracy, especially when a parent is facing potential penalties due to his or her child's behavior. An external regulator, having no social tie or stake in the decision, provides the least credible source of advice, leading to the greatest amount of piracy. Our analyses not only provide managerial insights but also develop theoretical understanding of the role of social ties in the context of advice.
Sharing of truthful information involving business intelligence between supply chain partners is a challenge on account of the asymmetric nature of the information, where one party possesses information such as market intelligence that is neither available in the public domain nor verifiable through third parties. While busesinss-to-business (B2B) technology solutions, such as CPFR (collaborative planning, forecasting, and replenishment), facilitate the sharing of historical information (e.g., transaction records), business intelligence (e.g., potential customer demand) is considered private. Central to CPFR is collaborative demand forecasting (CDF) that allows supply chain partners to share private demand information and incorporate the jointly derived demand forecast into production planning and product replenishment decisions. Implementing CDF, however, is a challenge because of the high costs of the laborious collaboration effort (e.g., to resolve forecast differences). Hence, companies are unable to realize the benefits of CDF and, in turn, the full potential of CPFR. Typically, the issues of information truthfulness and collaboration cost are addressed through an exception management mechanism that defines a range of forecast updates within which collaboration is automated without any human intervention in B2B trading partners. In this paper, we develop incentive-based contracts that explicitly consider the truth-telling behavior and exception resolution in decisions related to the threshold values of demand information. Our first contribution to B2B information management is in establishing the strategic value of exception management and resolution mechanisms in B2B relationships, leading to truthful revelation of demand information. Our second contribution is in developing exception-based incentive contracts, especially in light of the advances in today's business practices and technology, to address issues associated with unobservable and asymmetric demand information. Specifically, we propose a resolution contract to coordinate the supply chain that directly incorporates both exceptions and resolution in an incentive mechanism. We show that these alternative contracts are all viable solutions in assuring truthful exchange of demand information but excel individually in specific situations and, thus, provide practitioners with alternative demand collaboration tools when price negotiation is not an option.
We use coping theory to explore an underlying relationship between employee stress caused by burdensome, complex, and ambiguous information security requirements (termed "security-related stress" or SRS) and deliberate information security policy (ISP) violations. Results from a survey of 539 employee users suggest that SRS engenders an emotion-focused coping response in the form of moral disengagement from ISP violations, which in turn increases one's susceptibility to this behavior. Our multidimensional view of SRS—comprised of security-related overload, complexity, and uncertainty—offers a new perspective on the workplace environment factors that foster noncompliant user behavior and inspire cognitive rationalizations of such behavior. The study extends technostress research to the information systems security domain and provides a theoretical framework for the influence of SRS on user behavior. For practitioners, the results highlight the incidence of SRS in organizations and suggest potential mechanisms to counter the stressful effects of information security requirements.
More companies have realized that information technology (IT) outsourcing, once viewed as a cost reduction tool, could facilitate and even enable the transformation of their core business processes. The benefits from a potential outsourcing relationship expansion have strategic implications for relational incentive provision. Modeling "information poaching" in IT outsourcing as an incentive problem with contractibility constraints, our analysis shows that this problem could be mitigated in a repeated game where the outsourcing client and the service provider agree on a relational contract. When the two partners share the belief that they can potentially benefit from a future relationship expansion, they are more likely to behave cooperatively during the early stages of their relationship. However, when they disagree about the likelihood of the future relationship expansion, they will have different preferences on a set of otherwise equivalent relational bonus contracts. Specifically, they will adopt a relational contract with large but infrequent bonuses when the client is more optimistic than the service provider about the potential of their relationship. Because these results hold even when the sourcing partners' beliefs are very close to each other, our analysis sheds fresh light on the issue of equilibrium selection in relational contract theory. In the context of IT outsourcing, the results of this study suggest that, because salient forms of relational bonuses are often not adopted, relational incentive provision is likely more pervasive than what we can observe.
