An economic analysis of business-to-business electronic commerce: The interaction of industry structure and B2B-exchange design choices

Game-theoretic economic models are developed to explore the effects on output, price and welfare resulting from the establishment of B2B exchanges. The models are selected to represent differing degrees of industry concentration on the upstream and downstream sides of the market, based on case studies of B2B exchanges that have arisen in three sectors of the economy. The empirical analysis reveals that the value-creation strategy employed by B2B exchanges differs depending on whether the buyers and sellers face high or low levels of competition in their industries. When the sellers are concentrated and the buyers are competitive, B2B exchanges arise that follow a demand-pooling value-creation strategy. An economic model is developed to analyze such exchanges, deriving the equilibrium ownership and membership structure. It is found that high willingness-to-pay buyers will join the B2B exchange, and the introduction of the exchange will result in increased output, lower price and increased social welfare. These effects depend critically on the exchange's policy for collecting and disclosing transaction information, however, and obtain only if contracts of cooperation between sellers are excluded. When the sellers are competitive and the buyers are concentrated, empirical observations support the tendency for B2B exchanges arise to enable collaboration and the use of markets rather than hierarchies. A second economic model is developed to analyze exchanges in this setting, deriving the impact on price, output and profits. It is found that social welfare and buyers' profits both increase when such a B2B exchange is formed, as the buyers are able to overcome the coordination costs arising from private cost information held by the sellers. From the point of view of the sellers, the welfare effects of such B2B exchanges depend on the level of concentration in the sellers' own industry and the levels of concentration in industries that supply the buyers with complementary goods. As in the first model, it is found that the positive welfare effects of B2B-exchange formation depend critically on the design choices made with respect to information collection and disclosure, which is a key difference between B2B exchanges and other forms of interorganizational information systems.