Essay: E-Commerce and Brick & Mortar format comparison

Asymmetric Information
Both demand and supply side of the markets are affected by the E-commerce technology. On the demand side, customers cannot inspect goods prior to purchase. Also most of the online sellers are newer firms and they may have less reputation capital as compared to the existing traditional retailers. All these factors led to asymmetries in terms of information between buyers and sellers which are generally not present in brick and mortar format. Sellers have taken different steps in order to reduce market inefficiencies which are caused due to the information asymmetries. Free shipping on purchases and returns were offered by firms like Zappos. Another approach adopted was to convey information (prior to purchase) that would be garnered by inspecting the product. Firms can try to build up reputation for quality instead of providing information about the product itself.
Smith and Brynjolfsson (2001) studied online book market using data collected from online price comparison website. They find that brand value plays a significant role on consumer demand. Three online book retailers (Amazon, Barnes & Noble or Borders) were considered and consumers are willing to pay extra for one of them. This is due to the perceived reliability of the quality of services including shipping.
Resnik et al. (2006) conducted a field experiment which studies the effect of reputation in markets. A randomized subset of the lots was sold by an experienced eBay seller (with a good feedback) using its own identity. Another subset of the same lot was sold by the same seller but with a new identity and that too without buyer feedback history. The lots sold by the seller with its own identity received more winning bids as compared to the other one.
Reduced Consumer Search Costs
Normally Search costs in ecommerce platform are lower than in brick and mortar formats. The rise of different mediums such as price aggregation and shopbots (comparison sites), discussion forums that includes product review has led to decrease in cost of gathering information. Profitability and market share are affected by this factor.
Dick Astrid, Smith Michael D, Brynjolfsson Erik (2010) estimated the benefits associated with using data from a shopbot for books. The benefits from simply using search screens were estimated around $6.55 for the median consumer. Also more weight was put on non price factors such as brand by the consumers who search multiple screens.
Lower Distribution Costs
On the supply side, E-commerce can lead to the reduction in the supply chain costs and it improves customer service. Ecommerce affects the distribution of goods and in some cases internet has caused disintermediation. With the advancement in technology, demand of products can be quickly determined and this information can be transferred to the upstream which helps in reducing the requirement of inventory. One of the models that describe the effect of speed of communication on supply chain is drop-shipping. In this model, retailers convey order information to wholesalers who then deliver the product directly to the consumer, and thereby diverting the need for a retailer to physically manage the goods. This led to the reduction in distribution cost.
Randall, Netessine, and Rudi (2006) studied the different factors that play an important role while choosing particular supply chain design. The following observation was obtained from the market where retailers adopted drop-shipping model:
‘ Greater product variety
‘ Higher ratio of retailers to wholesalers
‘ Products those are large or heavy relative to their value
Product variety creates a rationale for drop shipping because in case of variety specific demand, it is very costly to maintain the appropriate inventory mix at the retail store.
Also savings can be realized if large products are delivered via drop-ship model as physically bringing the heavy products from wholesaler to retailer would involve high distribution cost.
Bricks and mortar operations cannot afford to offer a large number of varieties as contribution margin from low-volume varieties are not enough that it can cover the fixed costs of storing such products before sale. On the other hand, online marketplace aggregate demand of these low volume varieties over a large geographical market. Also fixed cost is not so high in online model.
Consumer Brand Loyalty
In this age of rapid growth, consumer behaviour changes frequently with the change in technology. It is difficult to maintain brand loyalty as transaction through a online medium is different from the traditional environment.
Peter J. Danaher, Isaac W. Wilson and Robert A. Davis (2003) studied the consumer behaviour for over 100 brands in 19 grocery categories. Data of a grocery retailer was collected who operates in both online and offline channels. Different methods were employed to measure the brand loyalty. One was to compare the purchases of same people over time in both offline and online channels. Other method was to compare loyalty from a baseline model. The outcome shows that in case of online medium, observed brand loyalty for high market share brands was significantly greater than expected value and reverse result for small share brands. On the other hand in case of traditional shopping environment, observed and predicted brand loyalty is not related to brand share.

Consumer Complaint Channel
With the advent of internet, it becomes easier for the user to publish their thoughts, feelings and viewpoints about the different products and services. Actually it provides a platform where user can express their negative experiences at extremely low cost and that too independent of time and distance.
Seul Lee and Brenda J.Cude (2012) studied the influence of the purchase medium on the selection of complaint channel. According to the report, both the purchase medium and level of dissatisfaction determines the selection of corresponding complaint channel. Specifically, ecommerce customers were more likely to resort to online channels as compared to offline channels and this was amplified as the level of dissatisfaction increases.

Source: Essay UK -

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