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

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In addition to price discrimination, many e-firms also attempt to increase profits by finding alternative ways of adding value for buyers. One method is through product differentiation. E-firms can charge more for unique goods and services labeled with a specific brand if that item imparts value for the buyer. Even when selling a fairly standardized product, e-firms can provide customization features to buyers (Bakos). For example, in the computer industry companies have been successful by allowing buyers to select the exact features they desire for a computer. Through the advanced use of information technology, these companies have designed their operations to quickly assemble a customized computer and ship it directly to the customer. Buyers, in turn, are willing to pay higher prices for a customized computer than for a mass-produced machine.

As with the improvements to productivity, the impact of e-commerce on prices in the long run will only be on the level of prices, not on inflation. The increase in competition associated with the introduction of e-commerce should have a short-term impact limited to the time it takes for the market to fully develop. After the e-commerce market has stabilized, the overall effect from the introduction of e-commerce should be a permanent decrease in prices due to the increased competition. The drop in prices leads to a temporary decrease in inflation given an unchanged stance of monetary policy. Once the price decrease is complete, inflation will then be expected to return to its previous level. Longer-term decreases in prices could occur if e-firms continue to find new ways to cut costs, perhaps through new innovations in information technology. Also, new technologies could be introduced to improve the way buyers and sellers interact. To the extent that such improvements decrease transaction costs, they also would lead to lower prices and downward pressure on inflation. In the end, the amount of downward pressure on inflation will be determined by the impact of e-commerce on productivity.

IV. CONCLUSION

E-commerce has emerged as a new way to transact in the marketplace. Initially introduced as a means for businesses to efficiently place orders over private EDI networks, the introduction of the Internet has recently spread the benefits of transacting electronically to consumers as well. While currently representing only a small share of total transactions, e-commerce has grown rapidly in recent years.

Over the next decade, the impact of e-commerce on economic activity in the United States is likely to grow.

Inflation and productivity are two areas of economic activity that are likely to be affected by e-commerce. The cost savings achieved by e-firms has led to higher productivity, and productivity growth will continue with new innovations. The emergence of e-commerce has also made the marketplace more competitive, leading many firms to charge lower prices and creating downward pressure on inflation. In addition, improved use of information technology has allowed e-firms to respond more quickly to changes in the economy. Firms not engaging in e-commerce will also increasingly need to lower prices and improve their productivity to remain competitive with e-firms. Together, these changes may alter the behavior of inflation in response to an economic shock.