A Transaction-Efficiency Analysis of an Internet Retailing Supply Chain in the Music CD Industry*

Decision Sciences, Winter 2003 by Rabinovich, Elliot, Bailey, Joseph P, Carter, Craig R

ABSTRACT

The emergence of the Internet may have fundamentally altered the mechanisms underlying information exchanges between sellers and end consumers. However, little attention has been given to the impact these mechanisms have on the efficiency of supply chain operations.

This paper begins to address this deficiency in the literature by evaluating supply chain transaction efficiency effects from Internet purchases by consumers. It develops and empirically tests a theoretical framework examining the role Internet purchases have in establishing transaction-efficiency levels in product exchanges involving sellers, placed at different supply chain echelons, and consumers. The theoretical framework integrates the transaction-cost and internet economics, inter-organizational information systems, and supply chain management literatures. Empirical testing, via structural equation modeling, is based on archival data in the Internet music CD market.

The results show that Internet-mediated purchases by consumers allow for greater transaction efficiencies when inventory ownership is postponed farther upstream in the supply chain and supply chain echelons are disintermediated. The results also indicate that channel structure configuration, defined by the supply chains' Internet retailing echelon, moderates these transaction efficiency effects.

Subject Areas: Electronic Commerce, Structural Equation Models, and Supply Chain Management.

INTRODUCTION

Because of its interoperability and open-standard settings for the transferal of data among organizations, the Internet has had a particularly deep impact on managerial practices by many buying and selling firms that trade products and resources, such as money and information (Bailey, 1998). This phenomenon is particularly noticeable in the retailing industry, where the gradual emergence of Internet-based sellers-that is, retailers, wholesalers, and manufacturers-participating in transactions with end consumers has underscored a shift in buyer-seller relationships.

This progression has been highlighted in previous research on Internet-facilitated consumer transactions (Bailey, 1998; Bakos, 1997; Brynjolfsson & Smith, 2000). Up until now, the research has centered on four transaction efficiency areas: product-price levels, menu costs, price-elasticity levels, and product-price dispersion (Smith, Bailey, & Brynjolfsson, 2000). Little is known about efficiency-generating decision-making mechanisms involved in product-exchange operations and transactions stemming from consumers' Internet purchases.

Furthermore, studies on Internet transaction efficiency have exclusively concentrated on dyads spanning only consumers and Internet retailers (Bailey, 1998; Brynjolfsson & Smith, 2000). Little attention has been given to transaction efficiency in the exchange of information and goods across multiple dyads of supply chains supporting the fulfillment of online consumer orders.

This paper addresses both of these literature gaps. It evaluates transactionefficiency-enabling decisions present in supply chains supporting the fulfillment of online consumer orders. And in so doing, it highlights avenues through which the Internet can integrate consumers into the efficient exchange of information and sourcing of products across multiple supply chain dyads. The rest of this paper is structured as follows. The next section presents the theoretical model. The section afterward presents the testable hypotheses and methodology. The final two sections discuss the statistical analysis and results, as well as the conclusions, implications, and opportunities stemming from this research.

THEORY

The management of supply chains emphasizes the need for integrating multiple echelons through information flows (Cooper & Ellram, 1993) and enabling the distribution of optimal material quantities to optimal locations in a timely manner (Simchi-Levi, Kaminski, & Simchi-Levi, 1999). The use of the Internet for retailing illustrates this principle, since it can potentially streamline supply chain information flows (Elofson & Robinson, 1998; Evans & Wurster, 1997; Hagel & Singer, 1999) and increase the efficiency of buyer-seller exchanges (Andrews & Trites, 1997; Eichhorn & Helleis, 1997; Kiang, Raghu, & Shang, 2000; Long, 1997; McKim, 1997; Sandilands, 1997; Sinha, 2000). The theoretical model addresses these concepts by (1) outlining the causal and moderating factors of supply chain transaction efficiency in traditional (non-Internet) retailing environments and (2) studying efficiency drivers in supply chains supporting Internet-retailing operations, based on these causal and moderating transaction efficiency elements.

Supply Chain Transaction Efficiency: Causal and Moderating Factors

The nature of transaction efficiency is deeply rooted in the minimization of transaction costs. The field of economics has used transaction costs to study the boundaries of the firm (Coase, 1937) and governance transactions between firms (Williamson, 1975). As transaction costs increase, market transaction efficiency decreases. These inefficiencies may result in higher market prices and promote vertical integration in the supply chain.