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Electronic Commerce

Electronic Commerce. Quality Uncertainty and Market Efficiency. The lemon problem. Akerlof (1970) (one of winners of 2001 Nobel economic prize) Unrevealed information about used cars (the lemon cars) Those low-quality used cars were sold in the prices higher than their actual values.

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Electronic Commerce

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  1. Electronic Commerce Quality Uncertainty and Market Efficiency

  2. The lemon problem • Akerlof (1970) (one of winners of 2001 Nobel economic prize) • Unrevealed information about used cars (the lemon cars) • Those low-quality used cars were sold in the prices higher than their actual values. • Lacking of the detective capability to discover the truth • Adverse screening in banking • Those who go for credit are short of money, why would the banks loan to them? The bank merely loaned capital to the affordable people. • Those who are in the serious financial straits unfortunately went to the covert private bank with more higher interest burden. • Other cases • Senior (veteran) vs. junior (a green hand)

  3. The market mechanism • Markets fail! No! • The market of lemon cars • Try out, a returnable term • Promise and guarantee commitment • The banking system • Raise the interest rate for incredible loaners • Credit reference and investigation • Dynamic interest rates of loan • The discriminatory pricing

  4. Quality signaling in the market • Price • Schumalensee effect • The firm’s reputation, The size of market share • Experience, Middlemen (commitment of third parties, retailers, brokers, infomediaries) • Costs for developing quality signal • Imitation, rip-off, fake • Incentive for revealing quality information • Raise prices higher for more returns

  5. Some social/economic phenomena about signaling failure • 濫竽充數, 混水摸魚 • 楚材晉用, 懷才不遇 • 魚目混珠 • Corresponding mechanisms?

  6. Online signaling mechanisms • Try-out strategy • Freeware • Shareware • Help users recognize the preference and valuate the willingness to pay • Possibility of discrimination • Segmentation

  7. The try-out economics If the cost bottom line is higher, then to sell at $1000 to high-type with try-outs. If the cost bottom line is lower, then to sell at $750 to all without try-outs.

  8. The efficiency of market • Transaction cost • Searching cost • Bargaining cost • Contracting/drafting cost • Enforcement/monitoring cost • Measurement cost • Bonding/safeguarding/punishing cost Facilitating signals?

  9. Functions of invisible hand— the price mechanism • Competition from sellers—reveal the bottom line of cost • Competition from buyers—reveal the upper bound of willingness to pay • Auctioning mechanism • Doubt auctions approximate toward to perfect competition

  10. The role of intermediary • As facilitators (matching & aggregating) • As experts (specific time and space knowledge) • As credible information sources (screening the cheating suppliers for preventing themselves from reputational spillover) • As producers (packaging and customization services)

  11. Quality assurance by intermediary • Subcontracting system • Competitive bidding • Long-term just-in-time system • Cf. Japan auto firms vs. U.S. GM/Ford • Incomplete contracting • The futurity depends on the current performance • Microproducts and micropayments • A form of incomplete contracting directly used between producers and end users, i.e., charging by each usage and punishment by termination

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