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Chapter 10
E-Commerce: Digital Markets, Digital Goods
Student Learning Objectives
1. What are the unique features of e-commerce, digital markets, and digital goods?
2. What are the principal e-commerce business and revenue models?
3. How has e-commerce transformed marketing?
4. How has e-commerce affected business-to-business transactions?
5. What is the role of m-commerce in business, and what are the most important
m-commerce applications?
6. What issues must be addressed when building an e-commerce Web site?
Learning Catalytics is a “bring your own device” student engagement, assessment, and
classroom intelligence system. It allows instructors to engage students in class with real-time
diagnostics. Students can use any modern, Web-enabled device (smartphone, tablet, or laptop) to
access it. For more information on using Learning Catalytics in your course, contact your
Pearson Representative.
Key Terms
The following alphabetical list identifies the key terms discussed in this chapter. The page
number for each key term is provided.
Advertising revenue model, 397
Long tail marketing, 401
Affiliate revenue model, 399
Market creator, 396
Behavioral marketing, 402
Market entry costs, 389
Business-to-business (B2B), 394
Marketspace, 387
Business-to-consumer (B2C), 394
Community providers, 397
Micropayment systems, 398
Consumer-to-consumer (C2C), 394
Mobile commerce (m-commerce), 394
Cost transparency, 389
Net marketplaces, 411
Crowdsourcing, 408
Personalization, 389
Customization, 390
Podcasting, 396
Digital goods, 392
Prediction market, 408
Direct goods, 411
Price discrimination, 389
Disintermediation, 391
Price transparency, 389
Dynamic pricing, 391
Private exchange, 410
Electronic data interchange (EDI), 409
Private industrial networks, 410
E-tailer, 395
Revenue model, 397
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Exchanges, 411
Richness, 389
Free/freemium revenue model, 399
Sales revenue model, 398
Geoadvertising services, 413
Search costs, 389
Geoinformation services, 413
Sharing economy, 397
Geosocial services, 412
Social graph, 405
Indirect goods, 411
Social shopping, 407
Information asymmetry, 390
Streaming, 396
Information density, 389
Subscription revenue model, 398
Intellectual property, 396
Transaction costs, 387
Location-based services, 412
Transaction fee revenue model, 399
Wisdom of crowds, 407
Teaching Suggestions
The opening case, “Pinterest: How Much Is a Picture Worth”, illustrates the evolution of
e-commerce from that of simply buying goods or services online to creating social experiences
shared by hundreds, thousands, or millions of people. It also shows how e-commerce is
becoming more “localized” because of the vast amounts of data collected about users and
because technology allows more targeted ad campaigns. Mobile e-commerce has grown by leaps
and bounds the last few years. However, it’s still questionable if some of the business strategies
will work in the long run, namely that of making a profit.
Section 10.1, “What are the unique features of e-commerce, digital markets, and digital
goods?” This part of the text stresses the use of the Internet and the World Wide Web for
electronic commerce and business. Ask your students to identify several of the many benefits
that the Internet offers to organizations. Ask them to provide specific examples that they have
read about in the text or have personally observed. If you have a student in your class who works
for a company that participates in electronic business and electronic commerce ask him/her to
explain the company’s activities.
Section 10.1 discusses the importance of e-commerce in the business world today. It discusses
the benefits of using Internet technology to lower transaction and agency costs, bypass
intermediaries, allow trading partners to directly communicate with one another and connect
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disparate systems, reduce delivery time for goods and services, make e-commerce available 24
hours a day, and replace existing distribution channels.
Section 10.2, “What are the principal e-commerce business and revenue models?” Students are
introduced to electronic commerce categories and related terminology. Even though millions of
people use the Web every day, many companies have found ways to personalize their interfaces
with individual customers. That is a remarkable feat when you think about it. Have students visit
Web sites that offer such personalization and report on the products or features they find. For
Interactive Session: Organizations: Can Pandora Succeed with Freemium?
Case Study Questions
1. Analyze Pandora using the value chain and competitive forces models. What
competitive forces does the company have to deal with? What is its customer value
proposition?
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Pandora must compete with AM/FM radio channels in the Traditional Competitor category of
Porter’s competitive forces model. However, it can make a substantial dent in listeners who are
looking for Substitute Products and Services category
2. Explain how Pandora’s “freemium” business model works. How does the company
generate revenue?
In a “freemium” business model, the company gives away a large chunk of its services with the
hope that a small number of customers will pay a premium price for extra or added services. If a
3. Can Pandora succeed with its “freemium” model? Why or why not? What people,
organization, and technology factors affect its success with this business model?
People: Internet users are used to getting much of their content free. That’s a very tough habit to
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Technology: Pandora’s royalty rates are less flexible than those of its competitor Spotify. It
could be paying even higher rates when its contracts expire in 2015. Mixing up the music chosen
Section 10.3, “How has e-commerce transformed marketing?” The Internet and Web have
turned traditional marketing methods on their head. Because so much data are gathered on
Section 10.4, “How has e-commerce affected business-to-business transactions?” Students
should pay close attention to this section because most of them will probably use some form of it
Section 10.5, “What is the role of m-commerce in business, and what are the most important
m-commerce applications?” M-commerce consists of selling anything over a mobile wireless
device or Net appliance. It is also a method used by marketers to target advertising more directly
Interactive Session: Technology: Will Mobile Technology Put Orbitz in the Lead?
Case Study Questions
1. How important is mobile technology in Orbitz’s business strategy? Why?
Orbitz connects consumers to plane tickets from 400 airlines, hotel rooms from 80,000 hotels
worldwide, as well as rental cars, cruises, and vacation packages. Orbitz, launched by five major
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airlines, was designed to compete with Internet travel companies such as Priceline, Travelocity,
and Expedia, which were upending the travel industry with their Internet presence.
2. What management, organization, and technology issues did Orbitz need to address in
its mobile strategy?
Management: Users want and expect speed when they access Web sites and services through
mobile devices. People can book an Orbitz hotel room in just three taps on their devices. It
further enhanced its iOS and Android apps to cut down the number of steps required to search
3. Why are mobile phone users much more likely to book same-day hotel room or airline
reservations?
Mobile phone users are more likely to book same-day hotel room or airline reservations because
they are traveling without access to a desktop or laptop computer. Orbitz instituted same-day
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4. What role does Orbitz for Business play in the company’s business strategy?
Because a large number of users are business-related travelers, Orbitz for Business plays a large
5. How successful is Orbitz’s mobile strategy? Explain your answer.
Chris Brown, Orbitz vice president in charge of product strategy, believes that although mobile
transactions in 2012 accounted for less than 10 percent of total Orbitz bookings, the ability to be
Section 10.6 “What issues must be addressed when building an e–commerce Web site?” This
may be the first time students are exposed to the mechanics of developing an e-commerce Web
site. No doubt they all have used e-commerce Web sites before but probably have never thought
about the challenges facing business managers who are responsible for building a successful
online business. Although this section doesn’t offer a step-by-step guide to building a Web site,
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Review Questions
10-1 What are the unique features of e-commerce, digital markets, and digital goods?
Name and describe four business trends and three technology trends shaping
e-commerce today.
List and describe the eight unique features of e-commerce.
Table 10.2 outlines eight unique features of e-commerce which include:
• E-commerce technology is ubiquitous, meaning that it is available just about
everywhere a computer can connect to the Internet.
• It has global reach, permitting commercial transactions to cross cultural and national
boundaries far more conveniently and cost effectively than is true in traditional
commerce.
Define a digital market and digital goods and describe their distinguishing features.
Digital markets are said to be more “transparent” than traditional markets. Table 10.3
describes distinguishing features of digital markets. The Internet has created a digital
marketplace where millions of people are able to exchange massive amounts of information
directly, instantly, and for free. Information asymmetry is reduced. Digital markets are very
flexible and efficient, with reduced search and transaction costs, lower menu prices, and the
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10-2 What are the principal e-commerce business and revenue models?
Name and describe the principal e-commerce business models.
Table 10.5 identifies seven Internet business models.
• E-tailer: Sells physical products directly to consumers or individual businesses.
• Transaction broker: Saves users money and time by processing online sale
transactions and generates a fee each time.
• Market creator: Provides a digital environment where buyers and sellers meet,
search for and display products, and establishes prices for those products; it can
Name and describe the e-commerce revenue models.
There are six e-commerce revenue models:
• Advertising revenue: Generates revenue by attracting a large audience of visitors
who can then be exposed to advertisements. It’s the most widely used revenue model
in e-commerce.
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• Free/freemium revenue: Basic services or content are free whereas advanced or
10-3 How has e-commerce transformed marketing?
Explain how social networking and the “wisdom of crowds” help companies improve
their marketing.
Networking sites sell banner, video, and text ads; sell user preference information to
marketers; and sell products such as music, videos, and e-books. Corporations set up their
own social networking profiles to interact with potential customers and “listen” to what
social networkers are saying about their products, and obtain valuable feedback from
consumers. At user-generated content sites, high-quality video content is used to display
advertising. Online communities are ideal venues to employ viral marketing techniques.
Creating sites where thousands, even millions, of people can interact offers business firms
commerce transformed marketing? AACSB: Analytical thinking.)
Define behavioral targeting and explain how it works at individual Web sites and on
advertising networks.
Behavioral targeting refers to tracking the click-streams of individuals for the purpose of
understanding their interests and intentions, and exposing them to advertisements which are
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Define the social graph and explain how it is used in e-commerce marketing.
A social graph is a depiction of all the people you know and all the people they know. A
digital social graph is a mapping of all significant online social relationships. It’s
10-4 How has e-commerce affected business-to-business transactions?
Explain how Internet technology supports business-to-business electronic commerce.
Business-to-business transactions can occur via a company Web site, net marketplace, or
private exchange. Web sites make it easy to sell and buy direct and indirect goods over the
Define and describe Net marketplaces and explain how they differ from private
industrial networks (private exchanges).
A Net marketplace is a single digital marketplace based on Internet technology linking many
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10-5 What is the role of m-commerce in business, and what are the most important
m-commerce applications?
List and describe important types of m-commerce services and applications.
The most popular categories of m-commerce services and applications for mobile computing
include:
• Location-based services: Users are able to locate restaurants, gasoline stations, local
entertainment, or call a cab.
• Banking and financial services: Users can manage their bank accounts, checking
account balances, transfer funds, and pay bills using their cell phones.
10-6 What issues must be addressed when building an e-commerce Web site?
List and describe the four types of e-commerce presence.
Figure 10.10 lists the four types of e-commerce presence businesses should consider:
• Web sites: traditional, mobile, and/or tablet platforms with search, display, apps,
affiliates, sponsorships as possible activities
• E-mail: internal lists and/or purchased lists as a platform with newsletters, updates,
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Discussion Questions
10-7 How does the Internet change consumer and supplier relationships?
Student answers to this question will vary.
10-8 The Internet may not make corporations obsolete, but the corporations will have to
change their business models. Do you agree? Why or why not?
Student answers to this question will vary.
10-9 How have social technologies changed e-commerce?
Student answers to this question will vary.
Hands-On MIS Projects
Management Decision Problems
10-10 Columbiana: A small, independent Caribbean island that wants to develop its tourist
industry and attract more visitors. How can a Web presence help? What Internet business
model would be appropriate? What functions should the Web site perform?
A Web site has the potential to introduce thousands and millions of people to a little known
resort destination at a significantly lower cost than other forms of marketing. The Web site
can highlight the island’s accommodations and show off its attractions. Web-cams could be
established around the island to give potential tourists and visitors insight into the island’s
10-11 Company-sponsored blog: Visit Blue Nile, Swatch, Lowe’s, and Priceline. Determine
which of these Web sites would benefit most from adding a company-sponsored blog to the
Web site. List the business benefits of the blog. Specify the intended audience for the blog.
Decide who in the company should author the blog, and select some topics for the blog.
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Improving Decision Making; Using Spreadsheet Software to Analyze a Dot-Com Business
Software skills: Spreadsheet downloading, formatting, and formulas
Business skills: Financial statement analysis
10-12 Answers will vary, depending on the company they select and the time period over which
it is analyzed. The files provided here are merely for purposes of illustration and the income
Achieving Operational Excellence: Evaluating E-Commerce Hosting Services
Software skills: Web browser software
Business skills: Evaluating e-commerce hosting services
10-13 You would like to set up a Web site to sell towels, linens, pottery, and tableware from
Portugal and are examining services for hosting small business Internet storefronts. Your Web
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YAHOO! Small Business Merchant Solutions
Starter
Standard
Professional
$50 setup fee
$50 setup fee
$50 setup fee
$39.95/month
$99.95/month
$299.95/month
GoDaddy.com
Economy Plan
Deluxe Plan
Unlimited Plan
3 mo: $4.99/mo
1 mo: $6.99/mo
1 mo: $14.99/mo
12 mo: $4.74/mo SAVE 5%‡
12 mo: $6.64/mo SAVE 5%‡
12 mo: $14.24/mo SAVE 5%‡
10%‡
15%‡
iPage.com
36-month term
$7.49 a month (billed $269.64 for 3 years)
24-month term
$8.49 a month (billed $203.76 for 2 years)
In addition to writing a report explaining the strengths and weaknesses, ask them to apply the
concepts of this chapter to their reports or at least to discuss them. Some of the topics should be
Collaboration and Teamwork Project
10-14. In MyMISLab, you will find a Collaboration and Teamwork Project dealing with
the concepts in this chapter. You will be able to use Google Drive, Google Docs, Google
Sites, Google +, or other open source collaboration tools to complete the assignment.
Case Study: Cultivating Customers the Social Way
10-15 Assess the management, organization, and technology issues for using social media to
engage with customers.
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Management: Companies can use social media to help build interest in their brands as long as
customers feel connected and at ease with the promotions. Personalizing the company can be a
huge success. Using Facebook to show what friends purchased by using the “Like” button can
draw customers into the company’s site.
Organization: Some companies use a dedicated team of Twitter responders to answer user
questions and respond to complaints. The company can then mine the data through text mining
Technology: Karaoke Heroes bar owners design Facebook ads to appeal to people most
interested in karaoke and are able to experiment with different Facebook ads for different
audiences without spending a great deal of money. Best Western Hotels and Medallia, a provider
of customer experience management software, created a tool that allows hotels to manage and
respond to social feedback and to perform sentiment analysis.
On the flip side, companies don’t have much control in the placement of their Facebook ads.
10-16 What are the advantages and disadvantages of using social media for advertising,
brand building, market research, and customer service?
Advantages:
• Advertising: Twitter has developed new offerings for advertisers such as Promoted
Tweets and Promoted Trends. These features give advertisers the ability to have their
tweets displayed more prominently when Twitter users search for certain keywords.
Disadvantages:
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10-17 Give some examples of management decisions that were facilitated by using social
media to interact with customers.
General Mills cereal company uses social media to discuss its own brands of cereal and
occasionally highlights rival cereals by providing recipes suggested by users. A common growth
strategy for General Mills and other cereal companies is to increase what marketers call “usage
occasions” by promoting how the cereals can be used in recipes, craft projects, or weight-loss
programs. General Mills has been using its Web site and social network presence to encourage
cereal consumption on these multiple fronts.
10-18 Should all companies use Facebook and Twitter for customer service and marketing?
Why or why not? What kinds of companies are best suited to use these platforms?
Before a company jumps into using Facebook and Twitter it needs to make sure the “back room”
mechanics are in place to process customer service requests. If the company’s employees are not
available for the unanticipated response volume, the plan could backfire.
Companies who interface directly with consumers are probably more suited to using Facebook
and Twitter promotions. However, all companies who create social media avenues with
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10-19 Describe four features of social commerce.
Visit MyMISLab for suggested answers.
10-20 Describe three ways in which businesses are able to sell to other businesses using the
Internet.
Visit MyMISLab for suggested answers.
For an example illustrating the concepts found in this chapter, view the videos
in mymislab.com.