Expanding commercial transactions occurring over open networks, such as the Internet. Both business-to-business and business-to-consumer transactions are included.
Electronic commerce between businesses and consumers is rapidly developing into a major economic activity. It may create new market opportunities not only in information and communications industries but in almost all industries involving commercial transactions with consumers. However, this raises many questions about existing forms of economic activity.
The "Internet economy" is compared to the Industrial Revolution in potential scope and size. While the physical aspects of any economy are still based on raw materials like steel, oil and gas, the Internet Economy is fundamentally different. This new economy relies on high-speed networks based on the Internet Protocol (IP), Internet applications, new marketing and business tools, and electronic intermediaries to increase the efficiency of Internet-driven markets.
Within the business-to-consumer segment, the leading activity is entertainment. This category is currently led by three activities: adult entertainment, online games which are frequently of a violent nature and gambling. Many of these segments raise cultural sensitivities and have been the source of discussion concerning their possible regulation. While these are important areas for political analysis and possible regulatory responses, the economic importance of these activities as a driving force of business-to-consumer electronic commerce should be acknowledged. Efforts to restrict these activities should be undertaken with some appreciation for the impact these actions could have on the development of electronic commerce.
In the business-to-consumer markets, digital products such as software, travel services, entertainment and finance are the leading electronic commerce products. Their intangible nature forces a re-evaluation of existing policies, rules and practices that were designed for tangible goods, or services that were traded locally.
Electronic commerce is currently relatively small and will continue to be so in the near future, but it is growing very quickly (over 200 per cent annually). When compared to benchmarks such as mail-order shopping, credit card transactions and traditional retail trade, it is clear that while important, electronic commerce is at an embryonic stage where technology and the dynamics of the market are still casting its basic shape. This suggests that policies should be crafted with caution and in recognition of the evolving nature of electronic commerce.
The proliferation of new businesses on the Internet is putting tremendous pressure on established bricks-and-mortar companies. The key issue is whether a hybrid business design, combining elements of traditional and on-line operations, can become viable and successful.
The term "new economy" describes this transformation of economic activities that is taking place as digital technologies make accessing, processing and storage of information increasingly cheaper and easier. The enormous volume of information is changing the way markets operate, leading to restructuring of businesses and opening up opportunities to create wealth through exploitation of available information.
There is a debate on whether or not the major changes caused by the internet are so radical as to merit the label 'new economy'. This can be seen every day in European media and policy statements but was originally stimulated in the USA by the exceptional performance of the US economy: 8 years of continuous growth; expansion at over 4% per year in recent years; controlled inflation below 2%; and unemployment less than 5%, in effect, full employment. Supporters of the new economy argue that digital technologies represent a shift of equal importance to the other major technological developments in the history of industrial societies: steam power, electricity and the internal combustion engine. The more sceptical view accepts that information and communication related industries are growing very quickly but not that the same productivity growth is observable in other sectors. In general, the sceptical view is 'not proven' rather than 'not true'. It should be noted that amongst the supporters of the new economy in the US, strong emphasis is put on the need for flexible markets.
Digital technologies have been available for more than thirty years and businesses have invested heavily in them over this period. Despite this, overall productivity ('total factor productivity') has only recently begun to increase in the US and not yet done so in the EU. Possibly this is because the benefits of technology are only realised when business organisation is restructured to maximise technological advantages and this is necessarily a long-run process.
Increased productivity growth in the US began around 1995, a date which coincides with the beginning of the 'world wide web' which effectively marked the birth of the Internet as a mass market medium. It has been suggested, although it is difficult to prove, that the Internet allowed the decades of technological accumulation to finally generate higher productivity. This assertion is supported by strong a proiri arguments that the Internet plays a key role in lowering business costs, making markets more efficient and competitive and thereby increasing productivity in the economy.
One of the most important features of the Internet and the reason why commentators consider it be the driver of future prosperity is that it's impact goes far beyond "high-tech" industries and has been felt across all industries and services. Enterprises in all sectors have become e-businesses. Indeed the most successful and fastest growing companies have been the ones that have succeeded in incorporating the Internet throughout their production and distribution chain.
In the light of rapid developments in technology and industry activities in the private sector, various groups of experts are currently discussing a number of issues concerning electronic commerce, particularly those regarding electronic commerce between businesses and consumers. Important policy issues on this demand-side of electronic commerce are privacy, consumer protection and taxation.
In March 1997, the OECD Committee on Consumer Policy, along with the OECD Committee on Information, Computer and Communications Policy convened an international gathering of information technology policy experts, consumer advocates, business and government representatives.
In 1999, the European Commission prepared a new directive regulating the Internet market. Under the terms of the proposal, where a consumer agrees electronically – by clicking on an icon, for example – to purchase a product or service, the contract is concluded when an acknowledgement of receipt of acceptance is received electronically by the purchaser. The seller must make it possible for the purchaser to obtain information which would allow him to identify and correct handling errors and accidental transactions before the conclusion of the contract. Finally, the seller will have to provide the buyer with the contract terms, in a way that will allow him to store and reproduce them.
E-Commerce, or the buying and selling of goods and services using the Internet, is already worth 17 billion Euro in the EU. It is expected to reach 340 billion Euro by 2003. However, his figure is well below the USA, where with a similar sized economy, e-commerce revenues are more than three times higher. However, Europe has strengths in several key areas, for example security and encrypt ion technologies and electronic banking. Widespread use of the Euro for electronic transactions will significantly contribute to the emergence of an EU-wide electronic market place.
An indicator of the key role of the Internet is the many recent announcements of leading automobile manufacturers, airlines and banks to develop Internet e-commerce strategies and to form alliances with internet service providers. The stock market confirms the benefits of such strategies by increasing the share value of companies when they launch an Internet strategy. There are many examples of new companies that have become world leaders in well established industries such as book retailing or stock brokerage by using the Internet These windows of opportunity are, however, short lived. Market entry soon becomes extremely costly because of the strong branding of certain e-commerce services.
The Internet and e-commerce are also leading to a surge in new company creation. Confirmation of this can be found in the market capitalisation of Internet companies. The US stock markets, especially the NASDAQ on which many 'high-tech' companies are quoted, has experienced exceptional growth. Similar developments are taking place in Europe where markets for fast growth companies have also been established – e.g. Neuer Markt, Nouveau Marché, EASDAQ – although the number of companies listed and the volumes traded are still relatively small compared to NASDAQ.
Purchasing of intermediate products and services via the Internet brings significant cost savings by reaching more suppliers and creating more competition in tenders.
Reorganisation of companies to incorporate the Internet into just-in-time supply and distribution leads to lower inventories and hence lower costs.
The Internet enables companies to cut distribution time by linking orders to production and utilising more efficient distribution services.
Financial transactions are cheaper online; customers have wider choice and better product information; corporate networks are increasingly used to cut management costs and improve efficiency.
New wider markets are opened up from sales by Internet.
It is cheaper to establish a web site than to use traditional forms of marketing.
The volume of business-to-business electronic commerce greatly exceeds that between businesses and consumers. Thus, while consumer issues are important and represent a potentially large market in the future, this should not obscure the importance of policy issues that are more business specific such as adapting commercial business codes to this new environment, transborder data flows between businesses, establishing new means for engaging in contracts (e.g. digital signature, authentication and certification) and improving the reliability of the infrastructure to meet the quality-of-service demands of businesses.
The growth of electronic commerce requires increased consumer confidence in privacy protection, including access to information and choice.
Consumers using e-commerce should be protected to the same extent as when buying goods and services via traditional distribution channels. New technologies and new marketing practices often lead to new kinds of scams or old scams in a new wrapping such as pyramid selling or fraudulent business opportunities. With electronic commerce, this phenomenon risks getting an international dimension.
If you're going to succeed in e-commerce, you have to be open for business all the time. You've got to provide 24-hour access to your site, 365 days a year, for customers placing orders, telemarketers tracking inventory levels, and to execute credit-card transactions in real time.
Transformation to the 'new economy', or the e-economy, will provide opportunities for economic growth through exploitation of new activities and by the increased productivity of existing activities.
Network economies augment productivity, which increases the potential output of the economy i.e. the rate of growth that can be achieved without causing inflation. Higher productivity could also lead to a short run decline in employment unless capital, labour and product markets function efficiently and create new activities to turn potential output into actual growth. What is needed is dynamic capital markets supporting new start-ups, a labour market that supplies a skilled and flexible workforce and competitive product markets which keeps down prices.
It would be a serious mistake to assume that the benefits from the new information economy will continue forever. For the new economy to succeed, it must be built on old virtues which include thrift, a sense of community and prudence.