What Impact Will E-Commerce Have on the U.S. Economy?

Federal Reserve Bank of Kansas City - Economic Review, Second Quarter 2004 by Willis, Jonathan L

Transaction costs are greatly reduced for e-commerce purchases. For retail businesses purchasing a wide assortment of items to replenish inventories, orders can be efficiently sent electronically to a supplier over an EDI network or the Internet. In addition, numerous B2B e-firms have been established to provide the service of a middleman for buyers and suppliers in automating procurement and contract processes through the use of B2B exchanges. Through these exchanges, businesses can continue purchasing from their existing suppliers but benefit from increased efficiency in the transaction process. In addition, consumers benefit from not having to wait in line to check out at a store or be put on hold when placing an order from a catalog.4

III. IMPLICATIONS OF FUTURE E-COMMERCE GROWTH

If buyers and sellers continue to increase their use of e-commerce, the overall economy is likely to be affected in two ways. First, cost savings achieved by e-commerce sellers will increasingly lead to higher productivity. Second, the combination of increased competition and cost savings will result in downward pressure on the price level and possibly inflation as many e-firms will charge lower prices than conventional sellers. Because of the small size of e-commerce, the largest impact on productivity and inflation in the near term will come from the response of firms not engaging in e-commerce as they face pressure to lower prices and increase productivity in order to remain competitive.

Impact on productivity

As e-commerce continues to expand, its impact on aggregate productivity is likely to increase. E-firms use information technology extensively to reduce costs of transactions, inventory holdings, advertising, search, and transportation. These cost savings are achieved in part through a reduction in the amount of labor required for each business task. As a result, productivity, which is measured by output per hour of all workers, is likely to be higher on average for e-firms than for non-e-firms. E-commerce will make a larger positive contribution to overall productivity as it continues to expand in size relative to the rest of the marketplace, but this impact is likely to occur over a long horizon.

While it is difficult to calculate a precise measure of the productivity gains associated with e-commerce, several studies attest to the real and potential improvements that can be achieved. In an internal study, Cisco Systems attempted to calculate the savings achieved through the use of e-commerce and related Internet-based management improvements between 1994 and 1999 (McAfee). The cost savings were achieved through improvements to e-commerce, customer care, supply chain management, and workforce optimization leading to productivity increases. Cisco concluded that the accumulated cost savings in these areas over five years was equivalent to 5.3 percent of their 1999 revenue. Nearly 10 percent of the cost savings were attributable solely to workforce optimization, which represents the direct gain to productivity. In a study of the auto industry, the estimated cost savings over the next decade attributed to use of e-commerce and related Internet-based management improvements are approximately 13 percent of total production costs (Fine and Raff). While detailed estimates of actual productivity gains for the auto industry are not available, some of the cost savings will result in higher productivity.