Andrew Allentuck

Monday, May 19, 2003

The Economics of E-Commerce: A Strategic Guide to Understanding and Designing the Online Marketplace
by Nir Vulkan
Princeton University Press, 2003),
218 pages
ISBN 0-691-0890-6-X

In spite of the ebbing of expectations for e-commerce, Nir Vulkan, a Fellow of Worcester College, Oxford, thinks that the economics of on-line business will revive the industry.

He examines competition in e-markets, adding evidence that shopping on-line for such things as insurance can reduce costs of coverage quite significantly. He goes on to examine bidding and buying procedures from the viewpoint of game theory. In a chapter on how e-commerce affects consumers, he shows that the use of shopping bots to examine markets for pricing should reduce he search costs of consumers to zero, even though brand loyalty and custom can reduce the effectiveness of shopping merely for the lowest price.

Game theory can be a driver for understanding the economic process of e-commerce and, to that end, Prof. Vulkan shows ways to create mechanisms to ensure the efficiency of e-commerce. Later, he examines negotiation in e-space and auctions in which, by avoiding a fixed price solution, sellers may be able to increase their profits.

E-business has been compared to a souped-up version of catalogue shopping, but Prof. Vulkan shows that in its avoidance of fixed price solutions and the ability of negotiators to use gaming strategies, it is clearly a different process. He compares digital shopping and trading more to the kasbahs of the Middle East.

The Economics of E-Commerce is really a textbook for postgraduate economics. But in its sophistication, it's a valuable analysis of how e-commerce works in economic terms. Corporate e-traders can learn much from it. Well-written, it is accessible to anyone with a couple of years of economics under his or her belt.