Wholesalers and retailers provide an essential services in physical markets. Imagine that you have to go to manufacturers for each household item you need: to Indianapolis for soaps, to New York for newspapers, to San Jose for computer software. By going to a local store, you save traveling costs but pay the margins for distributors. In many businesses, that margin for wholesalers and retailers is extraordinarily high. If there is a more efficient way of distributing goods, would it lower prices and increase consumer benefits?
On the Internet, customers can visit manufacturer's Web sites and order goods. Indeed, there are no physical or geographical obstacles for direct factory-to-consumer interactions. Therefore, at least that portion of the markup (distribution costs) will disappear. A market with no transaction costs or intermediaries will be friction-less.
Q: Will manufacturers sell products directly to consumers?
Will all businesses sell their products through their company Web pages? Dell Computers certainly proved that you can do a lot of business via Web storefronts. Does that mean everyone should follow its example?
With a global network, we can imagine an earth-wide market where distance means nothing. You can visit any manufacturer, any store on the net anytime. But, even in this seemingly ideal market where all buyers and all sellers can transact business face to face and one on one, there are needs for intermediaries. First, you need a way to find a buyer or a seller. The sheer number of market participants becomes a deterrent. When you found potential partners, do you trust those sellers or buyers to be reliable, their products to have satisfactory quality, and payments to be truthfully carried out? In case of Dell Computers, its customers already know about the company and its products. If you are presented with 10 Web sellers of light bulbs by an Internet search engine, will you visit each one of their Web sites and negotiate for price? Do you believe what they say who they are, how good their products are, and whether you will get the product after you pay for it?
Various phases of transactions may ultimately move to the Internet. The Internet may become the channel for marketing, product ordering and delivery (for digital products). However, direct producer-to-consumer transactions will be as rare as they are in physical markets even when that is physically possible. The primary reason is because buying a product involves much more than moving it spatially.
Q: What are the roles of Internet intermediaries?
Two types of intermediation will emerge in the electronic marketplace. One is to extend what we are familiar in physical markets into the virtual world. For example, search services and electronic malls are virtual counterparts of directory services, yellow pages and buying guides. Certification authorities play similar roles of notary, ID-issuing agencies (DMV), insurers, etc. Ecash banks and digital credit card services extend payment clearing functions into the Internet.
The other type of intermediation may evolve from the unique capabilities or needs of the networked market. This may involve breaking down the value-creating chain of the physical market into separate entities or combine them into a different type of service. For example, retailers have functions other than distribution. A posh department store transmits a message about the product it carries and their quality. Does a fancy Web site tell as much? A Web intermediary may sell quality information and nothing else. A toy retailer not only distributes but also presents a line of products toy buyers are interested in examining and comparing. Thus, an intermediary is needed if we are to avoid visiting each and every manufacturer of a toy item.
A retailer sells products as well as reputation about quality. Sometimes, that reputation might be a more important function of that business. For example, we presume the quality of news if it appears on CNN or the New York Times. But will we accept news from those on the Internet we never heard of? CNN and NYT are in reality just an intermediary, who collects news and information, re-package and distribute them. In the information age, they cannot (or should not) wish to dominate the market. Online versions of CNN and NYT may emerge as the trusted source of digital information but their value-creation processes are influenced by the needs of the physical market: costs of gathering information, being selective due to the constraints of time and space, the idiosyncracies of broadcast and print media, predominant ad-supported business models, etc. However the news business changes, however, the greatest asset of CNN and NYT is their reputation for quality, by which they can become the ultimate information intermediary in the digital economy.
