Since the dawn of the internet, transactions between buyers and sellers have moved from the physical to the electronic realm. While cash and check transactions still rule for smaller purchases, very rarely do consumers still insist on using a physical medium of exchange for larger expenditures. Credit cards, online banking, and other instruments of E-commerce have made it possible for actors in the modern economy to not only transfer larger amounts of currency, but also to do so more rapidly, efficiently, and safely. As a result, a number of economic activities such as stock exchanges, bank transfers, and even everyday shopping have begun to move to the internet.
The magnitude of this move is anything but insignificant. For example, online retail transactions have experienced rapid growth, doubling from $74 billion in 2004 to $145 billion in 2009. E-commerce manufacturing transactions experienced similar gains, increasing from a little less than $1 trillion in 2004 to $1.8 trillion in 2009. Even in this last year (2010-2011), total e- commerce retail sales increased by 10.9%, despite the economic downturn that continues to affect many traditional businesses. Most importantly, e-commerce growth has not shown signs of slowing in the near future. Online retail transactions are projected to further increase to $250 billion in 2014.
The reason for this phenomenon can be attributed to a number of factors distinct to either the consumer and or producer side. However, both producer and consumers are faced with the same truth: e-commerce will play an increasingly significant role in the American economy. Businesses will need to learn how to harness the potential of the internet lest they lose an important competitive edge. Likewise, consumers will need to adapt to a rather different marketplace, where in some cases the store may not even exist in the physical world, to gain the best value for their purchases.
The Internet. What is the nature of this new marketplace? The internet is a world of electronic data, where information and ideas can travel at the speed of light. Socially, it is a means by which individuals who may be separated by great distances can talk as if they are at the same location. Politically, it is the bastion of free speech, nearly untouchable by government hands (though potential legislations put that in question). Economically, it is the new way for sellers and buyers to connect, for businesses to communicate with each other, and for companies to show themselves to the world. E-commerce is becoming the mode of choice for transactions of all types in America.
There are a number of advantages to e-commerce over traditional commerce (commerce without use of the internet). The main benefit is connectivity. Traditionally, interactions between businesses and consumers took place inside an actual, physical building, like a store. However, a physical store is only able reach potential customers within a certain distance, and a business is limited in not only the number of stores it can build but also the locations in which the business can build them. However, an online store is granted access to approximately 240 million American internet users, simply by being online. The benefits of connectivity go even further beyond access, as advertising, news updates, and payment handling are all far more convenient and cost efficient through electronic means. For business to business interactions, e- commerce provides a way for different companies to connect, whether between cities or between continents. Other benefits of using e-commerce range from elimination of paper records to consolidation of operations in a single or a few locations.
Despite the move toward e- commerce, and despite the advantages of using the internet for economic activities, one significant problem still remains. It is not the technical limitations of computing technology, nor is it the increased security risks of online data storage. These are small problems compared to the big issue: information asymmetry.
Historically speaking, the seller always knows more about the product that the buyer. Whether the product is a physical good or a business product, the disparity between the information that the buyer needs to make a proper judgment about making a purchase and the information that the seller provides has existed since the beginning of trade itself.
Traditional commerce has done an adequate job of managing this disparity. For retail transactions, the buyer can view the product in real life, touch the product with his or her hands, and in most cases test the product out. In the case of business contracts, the buyer would be able to obtain all the information he or she needed by visiting the company’s facilities or by simply asking the seller. In both cases, the buyer rarely makes a wrong judgment solely because he or she lacks sufficient information.
The advent of e-commerce has widened this disparity to a significant degree. Although it is much easier to publish information through the internet, it is also much easier to conceal information from potential buyers. With e-commerce, there is no physical product for the customer to hold, inspect, or test. Instead, the customer is given a set of data pertaining to the product, which may include specifications, descriptions, and pictures. The customer pays for the product as shown by the seller, which may not be what the buyer wants in the first place.
As for business to business interactions such as investment, contracting, and other purchases, e- commerce has made calculation of risk increasingly difficult. Because barriers to entry are notably lower for online businesses, they are less likely to be successful, or permanent for that matter, than their traditional counterparts. Making sound judgments regarding such online businesses requires much more information, leading to the widening disparity between needed information and given information.
This information asymmetry has further affected a fundamental value of the American economy: trust. For business to consumer relations, establishment of trust is one of the key foundations if the business wishes to sell its products. However, the prevalence of online scams and phishing emails has severely eroded people’s trust in the internet, and consequently in online businesses. In a recent study, more than 90% of online consumers have refrained from completing an internet transaction due to fear of being defrauded.
Both sides lose here; the customer will not always buy the cheapest and highest quality product, and the best businesses will not always come out on top. Similarly, information asymmetry has led to a decrease in trust among online businesses themselves. Again, this is due to easy of entry, but ultimately the lack of trust in an online company may lead to its very downfall. While e-commerce has made doing business much more efficient and convenient, it has take a severe toll on the foundation of trust between economic actors.
Re-establishment of trust will need to go much farther than simply verifying “you are who you say you are.” Online buyers, both businesses and consumers, need to know not only the identity of the seller, but also past performance of the seller, previous opinions, and a host of other data in order to make a sound judgment. In fact, an online survey showed that 87% of online consumers “feel safer buying from websites that feature information about the business behind the website and its financial track record.” Unfortunately, this information is not always available to the public, and rarely is it made easily accessible by the company itself. Thus, the key to solving the information disparity will be transparency.
Transparency is a concept that has long been promoted in the political realm. Members of the public have routinely called for government on all levels to make clear the reasoning behind their actions and the flow of money supporting that action. I believe that this same concept should be applied to e-commerce, where instead of government transparency, we have business transparency. Businesses should be encouraged to show their past performance, their current goals, and their future investments.
The benefits of this change would only begin with the re-establishment of trust. The information disparity would be made insignificant, and the e- commerce world would receive a massive stimulus, one that perhaps could propel us out of this current economic recession.
Information transparency for now remains an idea in its infancy. Many websites already have mechanisms that track the past performance of other online businesses and independent sellers. Yet these systems often only cover small portions of the total online sellers, and they only track a specific profile, not a specific person. What we need is a truly universal system that can track individuals and business entities all across the internet and that provides a comprehensive analysis of past performance and credibility. What we need is a system where trust can be gained based on readily available data.
E-commerce in the American economy is growing at a remarkable rate. The internet has transformed the way that consumers and businesses interact and how businesses interact with each other. However, the current state of e-commerce has produced an information asymmetry, where a disparity exists between the information a buyer needs to make a sound judgment, and the information the seller provides. As a result, trust between entities on the internet is significantly lower than in traditional commerce. The key to solving this problem is transparency. A system is needed where information is made public, and business credibility is made clear.