Question

(a)What are transaction costs and how does the use of the internet lower transaction costs for e-businesses? [10 Marks]

(b) Explain how the internet pushes the competitive environment further towards the perfectly competitive model.

Answer 1

Transaction costs are expenses or costs that incur during the process of buying or selling goods or services. The transaction cost for buyers and sellers are payments made to the bank for the process.

Electronic business or ebusiness is doing business over the internet . Buying and selling of goods with the use of internet has lots of advantages to it than brick and mortar business. One main advantage is the reduction of transaction cost in the process of its business. Some of the following methods are

1. In ebusiness or online business the transaction cost will remain the same even if any number of customers log in for the product, whereas in offline business the transaction cost will change according to the number of the customers.

2. The overall cost of maintenance for the virtual store is much less compared to the offline store.

3. Maintaining an inventory is a very important part of offline stores but that is not an issue in online business because they can directly connect to the seller called as drop shipping.

4. Document preparation , telephone calling , data entry and other such activities are not necessary in ebusiness which will reduce cost.

5. Use of electronic invoicing is a great asset for ebusiness.

6. Resources needed are fewer for ebusiness compared to retail stores.

7. Reduced market and advertising cost is an added advantage for online marketing.

2. The internet pushes the competitive market towards the perfectly competitive model through the following aspects.

1. The internet market has all the details , to the core of its perfection , that customers need.

2. Product information, price, offers, and also reviews give a thorough picture of the product or service.

3. The number of customers visiting a site or a product is innumerable when compared to offline stores.

4. Customers decision making is purely based on all the information provided and sales happen at the instant.

5. Digital transactions at the time of emergency is a great opportunity through internet.

6. Customer loyalty and trust is strongly built by providing on time delivery and exchange of products at some situations.