The Effect of E-Commerce on Rural Communities: Manna, Mayhem, or Minutia

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The Effect of E-Commerce on Rural Communities
Manna, Mayhem, or Minutia

• Charles B. Moss

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Three Economic Models

• Our models of E-Commerce are based on three
  general strands of literature
• Models of Market Channels
• New Institutional Economics
• Mostly models of Transaction Costs based on Coase
• Schumpeterian Models of Innovation

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General Microeconomic Models

• In the most general terms, microeconomic models
  do not explain marketing channels
• Standard neoclassical models are typically models
  of efficient frontiers or optimal decisions for a
  given technology
• We start from a standard market channel

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• Under a slightly more complicated formulation, we
  could have two separate firms supplying inputs
  used by a processor who sells to the final demand

Producer 1
Producer 2
Processor
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• Finally adding differential transportation costs

Processor
Producer 1
Producer 2
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• The introduction of differential transportation
  costs
• Decrease overall production moved through the
  market channel
• It introduces two transportation cost wedges
• Increase the relative amount of goods being
  produced by the second producer
• The transportation cost wedge is smaller for the
  second producer
• One way to think about E-Commerce Innovations is
  a reduction in transportation costs
• It makes suppliers farther away (i.e., producer
  1) closer
• This increases their potential market share

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Coases Theorem

• The basic economic question is Why do two firms
  exist and not one or three?
• Coases answer is was that the boundaries of the
  firm depend on tradeoffs between
• Diseconomies of scope the cost of doing a
  second, different activity
• Transaction costs the implicit loss of finding
  and contracting with a buyer for the intermediate
  product
• Williamsons extension of Coases theorem defines
  three attributes of transaction cost
• Asset Specificity how specializes is your asset
  base (geographically specialized or economically
  specialized)
• Uncertainty how easy is it to ascertain what
  the intermediate output is worth?
• Frequency of Transaction is the intermediate
  output traded often

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• Specialized intermediate outputs with uncertain
  values and infrequent transactions have high
  transaction implicit transaction costs
• These high transaction costs in industrial
  organization tip the scales toward vertical
  integration
• Taking a different tack on Coases theorem, these
  high transaction costs also yield sticky markets
  or more locally protected markets
• Defining E-Commerce as a bundle of information
  technologies, this bundle
• Decreases the implicit transaction costs by
  reducing the uncertainty, or
• Reduces the search cost

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Schumpeterian Dynamics

• The final approach is the creative destruction of
  Schumpeterian competition
• In the Schumpeterian model, a winner or innovator
  wins monopolistic power
• However, the higher the monopolistic rents
  generated from the innovation, the more the
  winner of the last round invites a subsequent
  innovation
• The new innovator then replaces the old winner
  and the cycle starts over again
• Schumpeterian competition is more of a
  competition through time

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What Do the Three Models Imply?

• Technological innovation in the bundle of
  information technologies called E-Commerce
  implies potential reductions in
  transportation/transaction costs
• This should imply a narrowing of the margins
  through space or an increased competition across
  geographically dispersed markets
• However, it may also imply some increased
  transaction costs
• Uncertainty in contracting
• It will invite Schumpeterian competition
• Areas or enterprises with relatively high profits
  may be the first to be replaced
• Higher gains to innovation will invite additional
  innovation

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Original Question Manna, Mayhem, or Minutia

• Rural markets that are constrained by transaction
  or transportation costs will benefit (Manna)
• Floridas citrus packaging industry
• Rural markets that have benefited from
  informational fixities will be hurt (Mayhem)
• Local livestock auctions
• Equipment and parts dealers
• Rural markets where space yields no specific cost
  advantages or where transaction costs are
  relatively small will not be affected (Minutia)
• Local grocery stores