TAD Consortium November 1999 Information Update 1

ARTICLES
INTRODUCTION
E-COMMERCE AND LOCAL BUSINESSES
AN EXPLORATORY STUDY
COMMUNITY LEVEL IMPACTS OF ELECTRONIC COMMERCE
TOWARDS A LOCAL E-COMMERCE STRATEGY
TRUST AND EMBEDDEDNESS
CONSUMER NEEDS AND BEHAVIOR
COMPLEMENTARITIES BETWEEN WEB AND PHYSICAL PRESENCE
LOCAL KNOWLEDGE
REFERENCES CITED
FOOTNOTES

Community Level Socio-Economic Impacts of Electronic Commerce
Charles Steinfield

Visiting Professor

Faculty of Technology, Policy and Management
Delft University of Technology
Email: c.w.steinfield@sepa.tudelft.nl
Pamela Whitten

Department of Telecommunication
Michigan State University
Email: pwhitten@msu.edu

[Note from Phil Agre - original distributor of message

You should send this great paper to any small business or community economic

development people you happen to know, but its significance also runs

deeper. It's a study in the wrong-headededness of Internet hype, and in the

degree to which the culture has swallowed ideas about the Internet that make

no sense at all. In particular, the Internet is commonly associated with

globalness, and with primitive fantasies of transcendence and escape and

omnipotence -- fantasies that are misleading at best for most normal people.

Yes, electronic commerce probably means that many local businesses are

toast, although the ignominy of your life's work being wrecked by a

competitor who loses extraordinary amounts of money on every sale must be

considerable. But it's also true that many businesses, if not most, are

inherently local. The question is where to draw the dividing line around the

Internet's "impact". The Internet is all about boundaries, and theboundaries

around businesses, among businesses, and between businesses and their

customers are all being renegotiated. The bits that can be made global will

be, and the other bits can be restructured to amplify local knowledge and

connection and embeddedness. In short, although the hype may be right about

the magnitude of the changes, it is wrong about their nature. Unfortunately,

in the short run natural selection tends to favor easily-propagated ideas

over empirically-grounded ones. Serious ideas like the ones in this paper

take longer. Hopefully in the long run the damage from the hype can be

reversed. I've forwarded the paper by permission and extensively reformatted

it. Any glitches are my fault.]

INTRODUCTION

In the great excitement generated by the Internet's potential to globalize

commerce, researchers have virtually ignored how electronic commerce will

impact local businesses and their communities. A primary emphasis in most

discussions of electronic commerce is the global nature of electronic

markets, and the lower costs of reaching consumers throughout the world

(e.g., Amazon.com, a firm that did not even exist a couple of years ago, now

sells books in more than 150 countries). Through electronic commerce,

companies are now within reach of anyone with Internet access, enabling them

to compete with traditional businesses in any given community without having

to make the investments in "bricks and mortar" and without an expensive

private global telecommunications network. The Web theoretically lowers

transaction costs that formerly served as a barrier to entry in local

markets, enabling consumers to become aware of and transact with electronic

retailers located anywhere.

The rhetoric suggesting that electronic commerce fosters global markets is

convincing, and exerts a powerful influence on the business strategies of

companies going online (Steinfield & Klein, 1999). Indeed, an article in the

Economist proclaimed, "The Internet is affecting all businesses in similar

ways. Every industry, for example, has suddenly become part of a global

network where all companies are equally easy to reach. As a result of these

changes, many businesses that survived mainly because they were conveniently

placed, or because they provided information that was hard to find, will

soon have to find some other raison d'etre" (The Economist, 1997).

As electronic commerce grows, an important socio-economic side effect will

be increased competition with the traditional businesses in any given local

community (Steinfield, Mahler & Bauer, 1999a; 1999b). A recent report by

Jupiter Communications, an Internet research firm, estimated that 94 percent

of online purchases made in 1999 would otherwise have been made in

traditional retail channels (reported in CNN Interactive, August 6, 1999).

Of course, local businesses may also gain from the efficiencies afforded by

electronic commerce, both in better serving their local constituencies and

by reaching out to distant markets. Some anecdotal evidence suggests that in

some instances this is occurring, especially as traditional retailers learn

to better integrate their Web and physical outlets (New York Times, August

16, 1999; Steinfield & Klein, 1999). However, at least one study suggests

that local merchants are, in general, ill-prepared to take full advantage of

electronic commerce, and thus are unlikely to see any gains from it

(Steinfield, Mahler & Bauer, 1999). Other anecdotal evidence points to the

plight of local merchants who attempt to go online with limited resources,

with examples of local stores who sell little to nothing through their

online ventures (New York Times, July 26, 1999). These initial indications

suggest the need for new research on local impacts of e-commerce.

In this paper, we suggest that it is important to consider now how

electronic commerce may influence the health of local economies. Despite the

rhetoric that electronic commerce is free from the constraints of geography,

we argue that there are good reasons to reconsider the role of physical

location in making e-commerce policies. Following Steinfield et al., (1999a;

1999b), we outline the theoretical rationale for expectations regarding how

local businesses use and are impacted by electronic commerce. A small

exploratory study of local business use of the Web in one community

illustrates the general tendency to focus on distant, rather than local

markets. We then show that transaction cost and competitive advantage

approaches, supplemented by perspectives from research on social networks

and trust, enable the development of locally sensitive Web strategies for

businesses in a given community. We highlight generic strategies that local

businesses can use to leverage their physical presence in a market with

electronic commerce in order to better compete with distant Web-based

companies. The paper closes with a discussion of the policy implications

from a community perspective and an outline of research issues.

E-COMMERCE AND LOCAL BUSINESSES

Transaction-costs economics, emphasizing the cost-savings afforded by

network-based communication, is generally used to explain the rise of global

electronic markets (Benjamin & Wigand, 1995; Malone, Yates & Benjamin, 1987;

Miller, Clemons & Row, 1993; Wildman & Guerin-Calvert, 1990). Networks

reduce the constraints imposed by distance by permitting the rapid exchange

of information between distant buyers and sellers and can more effectively

link buyers with sellers while avoiding costly search efforts (Malone et

al., 1987; Wildman & Guerin-Calvert, 1990). Not only does electronic

commerce support the provision of goods and services at a lower cost, but it

can potentially enable greater customization to the needs of individual

buyers (Choi et al., 1996; Kalakota & Whinston, 1996). As the argument

typically goes, distance becomes irrelevant for goods and services that can

be produced anywhere and either delivered electronically or physically by

courier to buyers. Earlier analyses by Malone et al., (1987) spelled out the

network effects, particularly in the area of buyer search, where electronic

brokerage capabilities of networks enable buyers to search for and locate

products that match desired features and prices. The relatively low cost of

creating a Web presence, which is then accessible to those connected to the

Internet worldwide, enables firms to use their electronic site as a

surrogate to establishing a physical presence in a local market.

Distant Web-based businesses have several advantages over their local

physical businesses. Based on Steinfield et al., (1999a; 1999b), such

advantages include, but are not limited to:

* Access to a wider potential market.

* Lower sunk costs because a building or rented space in each market is not

required, and they may operate with less or no inventory.

* Better economies of scale arising from a larger customer base, and

consequent volume discounts on inputs. (1)

* Ability to set up facilities near important factors of production, which

would not be available to an "offline" physical business in a given

community.

* Lower costs due to the ability to bypass many of the intermediaries in the

retail distribution value chain (Wigand & Benjamin, 1995; Wigand, 1997). (2)

* A higher degree of transaction automation, leading to improved service and

lower labor costs.

* Ability to rapidly respond to changes in the market, through price

adjustments which can be almost in real time (Bailey, 1998), and well as

changes in product mix and marketing approach.

* Ability to easily capture and use market relevant data generated during

routine interactions with customers (Steinfield et al., 1993). Many smaller

local businesses are unlikely to have equivalent capabilities.

* Ability to add value to products and services by offering links to

complementary producers (Steinfield et al., 1993).

* Ability to offer 7 day by 24 hour access with little additional cost.

* No limitation on the depth of information provided to customers, which can

aid in product selection and potentially reduce return rates (New York

Times, August 23, 1999).

These economies can potentially enable Web-based retailers to easily

undercut the prices of local retailers who formerly faced little or no

competition. Despite some empirical evidence to the contrary (Bailey &

Brynjolfsson, 1997; Palmer, 1997) (3), there is a general expectation that

prices will be lower on the Web.

Using transaction cost theory, we can conclude that electronic commerce

implies new competition for local retailers, particularly those offering

products that are readily obtainable from other sources, and that are easily

transported (4). Of course, local merchants might respond by establishing

their own Web presence, making up any business lost to Web-based competitors

by expanding into new geographic markets themselves. However, there are good

reasons to be skeptical about the likely success of this strategy for many

smaller local retailers (Steinfield et al., 1999). Web startup firms face

significant barriers in their attempts to attract customers. The sheer

number of new Web businesses reduces the likelihood that people will chance

upon a Web store, necessitating large marketing and advertising expenditures

to get noticed. Smaller local retailers also may not have the business

systems in place to adequately serve distant customers, even if they do

attract them. The ability to process electronic orders, verify payments,

ship to distant customers, properly apply sales tax regimes, handle returns,

and many other skills need to be acquired. Moreover, despite the increasing

sales activity on the Web, lack of trust remains a strong inhibitor. Unknown

virtual Web stores are more likely to experience problems due to lack of

trust than established brand names, favoring the larger, nationally-known

company. In fact, at least one survey of Web users has shown that lack of a

local physical presence inhibits purchases (GVU Center, 1997)(5). Other

surveys suggest that problems with unreliable products and difficulties

returning goods have dissuaded Internet shoppers from being repeat buyers

(Coates, 1998). Recently, one Internet market research firm reported that

nearly two thirds of all online customers still do not trust Web sites with

private information, despite the use of prominently featured privacy

policies (Jupiter Communications, 1999). And, probably most importantly,

smaller local firms are unlikely to have the resources or skills to create

the kinds of sophisticated, highly interactive Web sites that now populate

the Web (New York Times, July 26, 1999).

Electronic commerce is also likely to influence the buying patterns of

businesses and consumers in a local community. Transaction cost economies

can also be used to explain the attractiveness of Web commerce for buyers

(including firms and individual consumers.) Electronic commerce has

implications for all stages in an economic exchange, including search and

evaluation in the pre-purchase phase, ordering and delivery in the purchase

phase, and after-sales service in the post-purchase phase (Choi et al.,

1996; Kalakota & Whinston, 1996). Gains accrue also to buyers, who can

reduce their transaction in each of these stages of the purchasing process.

As buyers seek out lower cost and higher quality producers on the Web, the

less sophisticated local providers not only fail in their efforts to

increase sales from distant customers, they also suffer losses in their own

market as well.

This effect also can occur in business-to-business transactions. The

burgeoning literature on IT and virtual organizations, combined with

transaction cost economics, suggests that the Web will encourage firms to

purchase goods and services from remote sources to find the best producers

regardless of location (Davidow & Malone, 1992; Wigand et al., 1997).

This suggests that many local businesses might not fare well in direct

competition with new Web competitors, particularly for easily transported

products. As we argue in a subsequent section of this paper, however,

businesses with a physical presence do have their own advantages when the

target market is in their specific geographically defined community. And,

when this physical presence is combined with creative uses of the Web

targeted to their local constituency, the resulting synergies can offer even

greater competitive advantage (Steinfield et al., 1999a; 1999b).

The rub is, however, that despite any potential relative advantage to

focusing on the local market, the evidence suggests that local businesses

are more likely to direct their Web commerce at distant markets (Steinfield

et al., 1999a) rather than their own local community. Studies seem to

indicate that the majority of local businesses are drawn to the almost

infinite audience now on the Internet, and focus on the Web as a tool to

grow sales rather than provide better services to their home market. Auger &

Gallaugher (1997), for example, compared the motivations to establish an

online presence among small and large Web-based businesses. They found that

smaller and medium-sized firms go online to increase sales outside their

geographic region, rather than to improve business in their local market.

Steinfield et al., (1999a) found little evidence of a locally-oriented Web

strategy among 250 businesses that had established Web sites in one

medium-sized Midwestern city. And, as we show below in a follow-up study of

almost 100 businesses in the same community a year later, there remains

relatively limited local focus on the Web sites of those that had developed

an online presence.

AN EXPLORATORY STUDY

In an attempt to understand if and how businesses located in a specific

local area are using the Internet to support and/or supplement their local

company, we conducted a study of local businesses in Lansing, Michigan. We

applied two data-collection strategies to gather this preliminary data. In

the first step, we randomly selected businesses from the Lansing area

business white pages and called them to determine which ones had a Web site.

Our goal was to randomly identify 25 local businesses with a Web site for

further analysis. We had to call 94 local businesses before reaching our

goal of identifying 25 businesses with Web sites. All 94 businesses were

asked basic demographic questions, but those with Web sites were asked

additional open-ended questions to ascertain their Web-related uses and

goals. For the second phase of data collection, we visited each of the Web

sites and conducted a content analysis based on 12 pre-defined variables

which identify strategies on the Web targeted for local customers. Of the 25

businesses that reported having a Web site, only 20 were actually accessible

during the data-collection phase of this study.

The results of this exploratory study appear to support our hypothesis that

few businesses were actually applying strategies on their Web site to take

advantage of their local presence. For those companies with a Web site, the

majority report the provision of information as a function of their site

with 37% providing company information and 19% providing product

information. In addition, 17% reported that customers can communicate

directly with the company via the Web site and 9% reported that a

transaction can be conducted via their Web site. When asked whether their

Web site targets people specifically in Lansing or elsewhere, 28% reported

Lansing, 48% reported elsewhere and 16% reported both. Just over one third

of the respondents feel that they have competition from other company's Web

sites that offer similar services. Thirty-six percent of the respondents

reported that they are doing some form of business-to-business transaction

via the Web such as purchasing products or services needed by their company.

One-quarter of the businesses report that they have tracked a difference in

their customer base since putting a site online with most reporting new

international clients. Sixty percent of the respondents have plans to

increase their use of the Internet to deliver products and services over the

next few years. Almost all the businesses felt the Internet can help them be

more competitive by enhancing their visibility and client access to their

products and services. However, our data did not tell us whether this

enhanced visibility and access would be on a local or global level.

Interestingly almost 50% feel that it is important to have a physical office

(or a local office) in a community to compliment a Web site because of the

need for personalized service and relationships and those products/services

which cannot be delivered via the Internet. Finally, 60% of the businesses

report membership in local organizations with the Chamber of Commerce being

the most common membership.

The results from the first phase of data collection point to some

interesting indications. First, these businesses are not currently using

their Web sites to deliver sophisticated services and less than half are

taking advantage of the Internet for products and services they need to run

their business. Even though many plan to ramp up their use of their Web

site, they didn't provide many concrete examples of exactly how they would

use this tool to become more competitive. And, more than half recognize the

need for local involvement evidenced through their membership in local

organizations. However, phase two of our data collection did not find

evidence that these businesses are using their Web sites strategically to

bolster business from their local community. Three-quarters of the sites

listed a local address and 80% provided a local phone number, however, only

35% provided a map or directions and only 15% included a photo of their

local facility. A mere 10% advertised in-store specials and only 5% used

coupons or some marketing strategy such as listing goods/services available

only at the business to bring clients into the physical store. The bottom

line is that these businesses do not appear to be employing strategies that

capitalize on their physical presence in the local community. Furthermore,

for those businesses without a Web presence, only 30% reported plans to

create a Web site for their business.

In summary, in this section we have identified two inter-related forces

stemming from the growth of electronic commerce that collectively threaten

the health of local communities. First, new competitors who offer goods and

services to a local market via the Web are likely to siphon away business

that formerly went to local physical providers. Conversely, the ready access

to new suppliers of goods and services who were formally unknown,

unavailable or too costly to reach, will shift the purchasing habits of both

local businesses and consumers. Second, local providers attracted by the

allure of the seemingly unlimited size of the Internet market, are more

likely to de-emphasize their geographic location and physical establishment

when they do go on the Web. Except in special cases, such as when local

providers are offering truly niche products unavailable elsewhere, or have

already developed a successful offline business catering to distant

customers (Steinfield et al., 1999a), targeting distant markets is not

likely to be successful for the majority of local businesses. And, local

communities are likely to be impacted as their local businesses look to

service clients outside their geographic area. Our next section outlines

some of resulting community level impacts.

COMMUNITY LEVEL IMPACTS OF ELECTRONIC COMMERCE

Our analysis up to now has focused on the individual firm level of analysis.

From an economic point of view, it can be argued that we should not be

concerned if electronic commerce helps to weed out inefficient local

producers. In this line of thinking, local consumers will be better off if

they obtain the goods and services they need from more efficient providers.

Social welfare is thereby enhanced, and therefore no action is required. The

fallacy with this view is that while indeed there will be individual cases

of local buyers gaining more value and greater access to suppliers, the

results at the aggregate community level may be undesirable for local

residents.

A community level focus would uncover, for example, some of the following

social costs of electronic commerce:

* Job losses, particularly in relatively unskilled areas already quickly

disappearing in the digital economy. Sales clerks, stockpersons, and other

entry level jobs offering employment options for teenagers and other

unskilled workers are likely to be the hardest hit.

* Loss of local shopping options that, even with higher prices, afforded

some conveniences. Consumers may have more choice on the Web, but they also

end up losing some necessary flexibility. Examples include situations where

a product is needed immediately, and cannot wait even for next day delivery

and more costly product returns.

* Decreased attractiveness of local community due to the loss of boutiques

or other businesses that enhanced the quality of community appearance and

life.

* Loss of locally produced goods and services that may have been tailored to

particular needs and tastes of the local community.

* Reduced tax income from business, resulting in a reduction in the ability

to fund government services that enhance community life.

Clearly not all communities will be affected equally, and some may even find

that electronic commerce leads to significant growth in jobs, tax revenues

and service levels. Larger communities may be less vulnerable for a number

of reasons. They may have more competitive local business, and their larger

population may make the effects of any loss in business less noticeable.

Community culture may play a role, such as university towns having more Web

savvy consumers. The nature of the local economy - for example a prevalence

of firms in high tech vs. heavy industry vs. services such as tourism - may

also influence the relative attractiveness of Web commerce and the

vulnerability of local businesses. Even the extent to which a community is

geographically isolated, influencing the availability of nearby businesses

within driving distance, and the resulting competitiveness of local firms

once they are exposed to Web competition, can be a factor. As we note in our

concluding section, there is a need for community level research to tease

apart the many possible social and economic impacts of electronic commerce.

TOWARDS A LOCAL E-COMMERCE STRATEGY

We believe that there are good reasons for businesses with a physical

presence in a community to develop a competitive strategy that leverages

their physical store when competing on the Web. Rather than using the Web

only to attract distant clients, an alternative strategy for local merchants

is to use it to better defend their home territory, and offer better service

to the local community (Steinfield et al., 1999a; 1999b). In this section,

we review the basic arguments for expecting local businesses to enjoy a

competitive advantage over their Web-only rivals when using a hybrid Web

plus physical presence strategy. Following Steinfield et al., (1999b), these

can be broadly grouped into four categories: 1) trust and embeddedness , 2)

consumer needs and behavior, 3) services and applications that capitalize

oncomplementarities between the Web and their physical presence, and 4)

local knowledge.

TRUST AND EMBEDDEDNESS

A commonly cited impediment to online shopping is consumers' lack of trust

in the legitimacy of the Web-based store (Bollier, 1995; Coates, 1998).

Indeed, the emerging digital certificate infrastructure appears to be

motivated by a desire to demonstrate to potential consumers that merchants

are not merely criminals masquerading as a business in order to obtain

credit card numbers. Consumers who recognize the Web store as an extension

of an existing business may perceive it to be more legitimate, and have more

trust in the store. This is not only likely to be a local phenomenon, but

certainly influences perceptions of national brands as well. Nonetheless, we

expect that consumers in any particular local market will have more

confidence in a Web business if they can associate it with a particular

physical store that they have visited or seen in their community. It also

may be the case that distant consumers will perceive a Web business to be

more legitimate if they are made aware that it has been a successful

physical business.

Embeddedness is a term that has been used by sociologists when describing

the extent to which economic exchanges are predicated upon patterns of

social relations in any community (Granovetter, 1985). According to

Granovetter, embeddedness is often considered a problem by economists, who

argue that when economic exchange is determined by social relations,

inefficient allocation of resources can result (6). However, he also notes

that social relations often facilitate trust, permitting exchanges without

expensive contracts or legal fees and thereby reducing costs. Recent

empirical work by Kraut et al., (1998) found that a strong predictor of the

use of a particular supplier for acquiring key inputs was the importance of

personal relationships between producer and supplier. They further found

that electronic exchanges between buyers and sellers are not only associated

with interpersonal linkages, but the quality of electronic exchanges

complemented by interpersonal relationships is higher than electronic-only

exchanges. Businesses in a community are likely to be embedded in a number

of local social and business groups that can serve as the basis for forming

such personal relationships.

Embeddedness that enhances trust can occur in more than familial relations.

Local merchants may belong to chambers of commerce, volunteer organizations,

churches, and other types of community groups. Through these efforts, they

become recognized and trusted members of the community. These associations

may extend to the Web, for example when other local businesses provide

reciprocal linkages or endorsements.

CONSUMER NEEDS AND BEHAVIOR

Consumers have a variety of needs and preferences that influence their

shopping behaviors. Here we mention only a few possible consumer needs and

shopping preferences that may offer a competitive advantage to a local

merchant who also establishes a locally-oriented Web presence. Our goal is

to illustrate those cases where the combination of Web plus physical

presence would have a greater chance of capturing business than a Web-only

presence.

With a locally available physical store, consumers' perceived risks in

engaging in online shopping are potentially reduced. As noted above,

problems associated with the return of faulty merchandise are a major reason

for lack of repeat online purchases (Coates, 1998). A local physical

presence reduces such risks by providing a low cost means for returning

flawed goods, or seeking technical assistance with a particular product.

People may also learn about products at the Web site, but confirm product

quality by visiting the store to physically inspect the goods prior to

purchase. Such pre-purchase and after-sales services not only reduce risk,

and thereby lower consumer transaction costs, they can further build trust

in the Web store.

Shoppers are not homogeneous, and may have different preferences that

influence their use of both regular and Web-based stores. Various market

segmentation approaches, such as SRI's Values and Lifestyles (VALs) and

Internet VALs (iVALs) are examples of marketers' attempts to understand

diverse consumer preferences that affect purchasing behaviors (7). It has

been suggested, for example that the Web excels in 'search' goods, for which

there are particular product features that enable evaluation by consumers

prior to use. The Web facilitates search allowing consumers to more easily

locate desired products (Klein, 1998). Klein (1998) argues that the Web even

turns 'experience' goods, which are thought of as products that can only be

evaluated after trying them, into search goods, by using multimedia

capabilities of the Web to permit online experience (8). Coupled with a

purchasing style characterized by extensive research prior to actual

purchase, the Web can be a powerful complement saving consumers on the high

search costs associated with such information gathering. Others suggest that

many consumers prefer the social and personal experience of shopping,

engaging in interaction with others in the marketplace as they shop (Sarkar

et al., 1995). With both a Web and physical store, such diverse preferences

can be addressed. There are likely to be shoppers who exhibit hybrid

patterns, such as preference for gathering information online, but making

actual purchases in a store. Some may prefer the convenience afforded by the

Web, and use it to locate desired products, but due to the lack of trust in

the security of the Web, prefer to make actual transactions in person.

Perhaps most important are the consumers who desire immediate gratification,

and do not want to wait for products to be shipped. They may identify

products online, but cater to their desires for immediate gratification by

picking up the product at the local store. These are all examples where the

physical store would capture purchases that otherwise would not have been

made with only a Web-based store.

COMPLEMENTARITIES BETWEEN WEB AND PHYSICAL PRESENCE

The Web store and the physical store can support each other in many

different ways, capitalizing on natural complementarities (Steinfield et

al., 1999). These include cross promotions, joint-service provisions, and

value-added services. Cross promotions are perhaps the most straightforward

example of a natural complementarity. Web stores may provide the bargains

that people may expect when shopping on the Internet, but also offer coupons

for in-store purchases. Marketers are accustomed to the use of

'loss-leaders' as an approach to increasing store traffic, and realize that

once in the store, other purchases for non-discounted merchandise are more

likely. A physical store can use its Web site to highlight local events,

such as a reading or performance at the store, helping to bring in traffic.

The Web store may also provide information about additional services that

are available at the store that add value to products purchased online. A

company might use electronic mail for direct marketing, not only to

advertise the Web site, but also to provide information about in-store

products and services. Some services might be provided jointly, leveraging

the investment in physical and Web presence. A good example would be when a

computer store offers a product online, but provides installation and repair

services at their premises for customers purchasing from their Web site.

Finally, the Web store may function as a source of value-added services for

customers who have purchased or plan to purchase goods at the physical

store. A purchaser of a musical instrument, for example, may find additional

sheet music at the store's Web site. Also, Heikillä, Kallio, Saarinen &

Tuunainen (1998) describe the emergence of Web-based grocery sites, where

customers gain convenience by shopping online. A local grocery store then

delivers the chosen items. Finally, a number of stores have initiated

in-store Web kiosks as a means of lowering costs and improving service (New

York Times, August 16, 1999.) In-store shoppers gained the ability to search

for products not on display, gather in-depth information without taking up

the salesperson's time, and even purchase or pay for products for immediate

or subsequent delivery. These various complementary approaches represent a

sampling of strategies a retailer might use to leverage their investment in

physical and Web distribution channels. In many cases, the natural

complementarities offer a distinct advantage over Web-only stores that might

require shipping a product back for additional service or installation work.

LOCAL KNOWLEDGE

Local merchants who target a local market should be able to capitalize on

their local knowledge to compete effectively against distant virtual stores.

Bouwman (1999) for example, points out that in many parts of the world,

there are local or regional language differences that can be captured in the

Web content to increase the appeal of the site. Local customs, tastes and

product references will be known by local merchants, but not necessarily

distant virtual sellers. Prominent local citizens who offer endorsements,

reference to local landmarks, awareness of important local events that may

influence purchase patterns, and many other local content strategies should

help make a merchants Web site more meaningful and appealing to the local

target market. It would be difficult for globally-oriented Web businesses to

capture the same degree of local relevance.

In summary, we have outlined four categories which offer strategic

advantages to merchants who uses the Web to compliment their physical

business in a local community. Whether they build upon pre-established

relationships to take advantage of trust, facilitate their clients' ability

to use the Web to access those services which they would rather obtain

remotely, or take advantage of local inside information to develop

promotional strategies, the local merchant who supplements his business with

a sophisticated Web site would appear to have the upper hand over some

remote online-only companies. However, there is a great deal we have yet to

understand to help us pinpoint the economic and social advantages held by

the local merchant. The final section of our paper outlines a research

agenda which can be used in the long-term development of policy to maximize

appropriate commerce practices over the Internet. Towards a Research Agenda

We suggest that there are indications, given the Internet market research

cited earlier and our preliminary studies over the past year, that there is

cause for concern at the local community level. Our discussion is largely

speculative, however, and there is now a need for more formal social and

economic research to inform policy makers and give guidance to community

leaders. Research in several areas now appears warranted.

First, there is clearly a need to develop a rigorous and pervasive system of

monitoring the flows of electronic commerce activity, all the way down to

the individual and firm level of analysis. Systems for measuring on and

offline purchasing activity, that not only measures buyer location, but also

seller location, are essential. Given that existing DNS conventions make it

difficult to identify the location of buyers and sellers, alternative

methods need to be developed (OECD, 1998). Largely, such information may

need to be reported at regular intervals by individual consumers and

businesses, perhaps through such mechanisms as the US Census. At the May

1999 Digital Economy conference sponsored by the US Department of Commerce,

there were clear indications from the US Census Bureau that a new set of

electronic commerce measures would appear in upcoming surveys. These are

important first steps, especially since the data can then easily be

aggregated to the community level, state, and regional level. It would then

be possible to estimate net gains and losses in economic activity in

communities, and to link these outcomes to other social and economic

indicators.

Another line of research suggested by our discussion is to identify and then

focus on the most vulnerable types of business (e.g., books, music, travel

services) and track the extent to which Web-based commerce is associated

with declining numbers of firms.

More broadly, research that looks for broad shifts in the nature of

businesses that flourish and those that disappear in various types of

communities would also be warranted. Moreover, research that links the

changes in the business landscape to particular policies such as local

taxation of e-commerce, would help guide policy makers.

We can also suggest more individual and organizational level research. An

open question, for example, is how individual buyers are likely to respond

to locally-oriented Web strategies. Does it truly enhance trust, and is

there any perceived value to such approaches from a buyer perspective?

Empirical research can shed light on the viability of the many different

strategies that e-commerce observers suggest for traditional businesses.

These include turning physically-based retailing into more of an

entertainment experience, emphasizing local ties, and offering in-store Web

access.

All of these research questions will provide data to help us better

understand the economic and quality of life impacts of electronic commerce

on local communities. In addition, they will provide vital information that

can be used by local businesses to guide investment decisions regarding

physical and/or Web presence in a community.

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FOOTNOTES

1. 1. Although some evidence suggests that size of firm has less relevance

on Web retailing, given the relatively low costs to establish a Web presence

(Kennedy & Dietsch, 1995). Nonetheless, there is clear potential for a large

retailer who then goes on the Web to use their buying clout to acquire

products at a lower per unit cost than both small Web retailers or small

physical retailers.

2. 2. However, Sarkar, Butler & Steinfield (1995; 1998) present arguments

for increasing, rather than decreasing numbers of intermediaries in the

electronic commerce environment.

3. 3. Bailey and Brynjolfsson (1997) report, for example, that in their

empirical analyses the prices of books, CDs and software were higher on

average on the Web than in Boston area stores. Palmer (1997) found no

significant difference between in-store prices and prices in Web stores,

catalogs and cable TV shopping channels across a variety of products. One

plausible explanation is that Web-merchants were simply using a price

discrimination approach that allowed them to find buyers willing to pay

extra for the added convenience of Web shopping.

4. 4. Note that this is even more true for information products that can be

delivered electronically via the Internet.

5. 5. In a 1997 GVU survey (GVU Center, 1997), more than half of all

respondents required or preferred an offline presence before shopping on the

6. 6. Consider for example, the inefficiencies resulting from a producer

buying needed inputs from a family member rather than a lower cost competing

supplier.

8. 8. For example, music is normally thought to be an experience good. Web

sites such as CDNow, however, allow consumers to search by artist or genre,

and hear a short preview prior to purchasing music.

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Telematics for African Development Consortium

P.O. Box 31822

Braamfontein

2017

Johannesburg

South Africa

Tel: +27 +11 403-2813

Fax: +27 +11 403-2814

neilshel@icon.co.za

www.saide.org.za

* To view an archive of previous updates visit:

www.saide.org.za/tad/archive.htm

* For resources on distance education and

technology use in Southern Africa visit:

www.saide.org.za/worldbank/Default.htm

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