impact of IT
In the literature, the impact of IT on markets is either seen as a reason for the reduction of the number of intermediaries or as a reason for an increased role played by intermediation in the exchange processes. Discuss.
This question asks you to discuss a specific process which affects electronic markets. It asks you to discuss the effects of ICTs on the process of intermediation and therefore the impact of ICTs on the role played by intermediaries in electronic markets. Intermediaries are generally defined as economic agents that facilitate the execution of the economic activities along the value chain. From the transaction costs perspective, intermediaries are economic agents who lower transaction costs by facilitating the execution of the exchange between buyers and sellers. Intermediaries reduce transaction costs of helping to gather information, evaluate alternative options, negotiate and contract the exchange. ICT can be a substitute for traditional intermediaries as it can do for free what intermediaries do for a fee. ICT in fact allows trading partners to process information, exchange it, and use it in a more efficient and effective way. ICT is generating positive effects for information communication, brokerage, and integration, reducing transactional uncertainty and thus the costs associated with the exchange of goods and services (Malone, 1987; Ciborra, 1993). ICT therefore reduces the need for traditional intermediaries that help the exchange process by smoothing the information flow needed to support the transaction.
Disintermediation is the process by which the number of economic agents involved in an exchange (i.e. resellers, wholesalers and mediators) is reduced. Disintermediation typically occurs because ICT does in a more effective way what traditional intermediaries do for a fee. Following the transaction costs argument, ICT provides better opportunities to process information related to the exchange, reducing the need for support for buyers and sellers in managing the essential information needed for the exchange. ICT therefore reduces the need for third party services and hence the costs faced by buyers and sellers. The first reason why disintermediation occurs is therefore rooted in transaction cost theory.
Traditionally, disintermediation occurs when ICT implementations enable economic agents to bypass third parties and directly engage in economic activities with their counterparties. In the context of electronic businesses, it has come to signify the disappearance of a wide variety of ‘middlemen’, or intermediaries, and the creation of an enhanced sales network in which customers deal directly with service providers. The result is supposed to be a ‘frictionless economic environment’ that reduces both inefficiencies and transaction costs.
Chaffey (2009, Chapter 2) demonstrates the costs saved in a conventional producer-wholesaler-retailer-consumer value chain by, firstly, disintermediating (eliminating) the wholesaler and then, secondly, by disintermediating both the wholesaler and the retailer. In the latter case, the price to the consumer becomes the same as that charged originally by the producer to the wholesaler and is less than half the old price that the retailer charged the consumer. This happens because ICT can reduce search costs, contracting cost, control and regulation costs through facilitating the exchange of information between economic agents (described by Malone et al. 1987 as ‘electronic communication effects’) and because it makes it easier to match buyers and sellers (Malone’s
‘electronic brokerage effects’).
There are therefore valid economic incentives for both producers and consumers to bypass intermediaries and push them out of the value chain. Intermediaries add significant costs to the value chain and, by suppressing them, the profit margins of producers can increase while at the same offering lower prices to consumers. Advanced uses of ICT and the evolution of electronic marketplaces have reduced the transaction costs for producers, thus enabling them to internalise activities that had to be served by intermediaries in a traditional market. This has created the opportunity to distribute profits within the value system by driving the intermediaries to extinction. Under such a scenario, producers can benefit from increasing their profit margins and passing part of their savings to consumers who thus enjoy lower prices and greater choice.
Despite the effect of ICT on disintermediation, electronic markets are also experiencing the opposite effect, the re-intermediation of the value chain. While ICT modifies the access to information and therefore allows agents to bypass traditional intermediaries to execute transactions, a new form of intermediation is emerging alongside the wide adoption of ICT. ICTs are in fact making more and more information available to economic agents so that it is increasing difficult to find the right information needed by the agents to conclude the exchange. If you are looking for information on a specific product, you will find it difficult to identify the right website to support your search without the use of a search engine such as Google. Search engines are intermediaries which reduce the cost of getting access and using information. These intermediaries, given the nature of their tasks, are defined as information brokers or infomediaries (Hagel and Rayport, 1997). Chaffey (Chapter 2) discusses the role of these new intermediaries and describes in detail their different forms and business models.
A good answer will discuss the differences between disintermediation and re-intermediation. An excellent answer will discuss the intertwined effects of ICT on electronic markets highlighting the continuous tension between disintermediation and re-intermediation. While ICT disintermediate certain intermediaries, it also creates the condition for the increased need of new intermediaries.
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