Economic effects of sales represent 7.7% of total merchant wholesale trade sales.
In
e-commerce
Frans Suijker*
Abstract
Although still in its infancy, electronic commerce (e-com-
merce) may have large economic effects in the future. E-com-
merce can improve the transparency of markets and can result
in efficiency gains via lower procurement and inventory costs
and better supply chain management. It can also be a source
of new products. During a transitory period, a surge in e-com-
merce may boost macroeconomic growth and reduce infla-
tion, if markets function well. This note explores the potential
microeconomic, sectoral and macroeconomic effects of
e-commerce.
cpb Report 2002/3
Introduction
This note explores the economic impact of e-commerce by identi-
fying potential effects at the microeconomic, sectoral and macro-
economic levels and linking these effects. This can be useful for
40 assessing the overall net impact of e-commerce.
This paper uses a broad definition of e-commerce. Electronic
commerce is the exchange of information across electronic net-
works, at any stage in the supply chain, whether within an organi-
sation, between businesses, between businesses and consumers,
or between the public and private sectors, whether paid or
unpaid1. This broad definition stresses the importance of an effi-
cient exchange of information, whereas narrower definitions refer lower prices3. Furthermore, the higher level of transparency
only to electronic transactions. This note focuses on e-commerce
between businesses (B2B) and between businesses and con-
sumers (B2C).
At present, electronic sales still represent a relatively small
share in total economic activity. In 2001, Internet sales accounted
for only 1% of total retail sales in the United States (US
Department of Commerce (2002)). B2B e-commerce is larger than pliers and customers4 can reduce the cost of procurement, pro-
B2C e-commerce, but is spread unevenly at the industry level. In
US manufacturing, e-commerce shipments account for 18.4% of
the total value of manufacturing shipments, while e-commerce
* For more information, contact Frans Suijker (tel: +31-70-3383390;
e-mail: f.w.suijker@cpb.nl)
contrast, e-commerce accounts for less than 1% of sales among
retailers and a group of selected service industries. In the
Netherlands, e-commerce shares are even lower than in the
United States (Statistics Netherlands (2002)). However, e-com-
merce has the potential for huge growth and high economic
impact in the future.
Microeconomic effects of B2C e-commerce in search goods
Figure 1 sketches the microeconomic effects of a rise in B2C
e-commerce in search goods. Search goods are goods of which the
quality can be ascertained by consumers before a purchase (Tirole
(1988)). Examples are a specific book or a PC with specific
features.
The figure indicates that ICT enables e-commerce. E-com-
merce has two main effects. It can enlarge the transparency of
markets and open the door for new products and production
processes. More transparency and higher efficiency may produce
quite positive welfare effects. Figure 1 also indicates the macro-
economic consequences that will be discussed below.
Furthermore, figure 1 offers useful elements for assessing the
sectoral effects.
Consumers can search for the lowest price of certain search
goods on the Internet. They can buy from foreign sellers, and sell-
ers can reach more buyers. Markets thus become not only more
transparent, but also larger. Therefore, e-commerce can intensify
competition. This results in lower profit margins and a decrease
of X-inefficiency2. The broadening of markets offers the opportu-
nity to exploit economies of scale. In the end, consumers face
causes lower search and transaction costs (in time and money).
A better fit between demand and supply is possible because of
increased information and choice.
Intensified competition and adoption of network technology
may also result in an adjustment of production processes. A fast
and efficient exchange of information within a firm and with sup-
duction and sales. Better supply chain management may increase
efficiency. The higher productivity may lead to lower prices.
Furthermore, the new technology may create new goods and
services.
To conclude, e-commerce in search goods may cause lower
prices (as a result of greater transparency of markets and higher
 Figure 1 Microeconomic effects of B2C e-commerce in search goods
better fit of demand and supply
More
transparent lower search- and transaction costs
and larger
market
more economies of scale
stronger competition lower profit margins
decrease in X-inefficiency
lower procurement, production and sales costs
Adoption of
ICT increase in productivity
new products
indicates macro-economic consequences
efficiency). The rise of e-commerce in search goods can be inter-
preted as a rightward shift of the supply curve that increases
welfare. However, e-commerce can have less positive effects,
especially because intensified competition may not happen . 5
For instance, economies of scale and a good reputation can offer
a few e-tailers (for example, Amazon) some market power on an
electronic market. Increased transparency also makes it easy for
competing firms to compare prices and to react immediately to
the price decreases of competitors. This knowledge can even be
an incentive not to change prices, and in that way it may result in
tacit collusion. Furthermore, producers may react to intensified
competition by product differentiation. It may thus be more
difficult for consumers to compare products on the Internet. They
must compare not only prices but also quality characteristics.
Prices may not fall, in this case, although a positive welfare effect
may still be experienced due to the greater variety of goods.
higher welfare
lower
prices
cpb Report 2002/3
higher welfare
41
Microeconomic effects of B2C e-commerce in other goods
E-commerce in goods other than search goods may also have less
positive effects. For instance, most experience goods are not fit for
electronic transactions because consumers first want to see, touch
or try these goods before buying (for example, cars and houses).
So, competition for these goods will not intensify strongly.
However, the Internet is a useful instrument for collecting infor-
mation about these goods. It may lower search costs for con-
sumers and sales costs for producers, and may improve the match
between demand and supply.
A special category of (experience) goods are digitised informa-
tion goods (music, games, software). These goods are characterised
by high fixed costs of product development and low marginal
costs of production. By way of a diversified pricing policy (person-
alised pricing, versioning and group pricing) and distribution
methods (focus groups, free samples, share ware) producers of
information goods try to maximise their sales as soon as possible
in order to make up for the sunk costs (Shapiro and Varian
 (1999)). Distribution costs of digital goods are very low. Moreover,
digital distribution has low external effects on the environment,
because trucks are not needed to deliver goods.
Furthermore, information goods such as software exhibit
network and lock-in effects. The value of such goods increases
with the number of people that already use the product (network
effects). Buyers have costs when they switch to other software sys-
tems because they need training in order to use the software.
These switching costs may lead to consumer lock-in and monop-
oly exploitation. Even ‘winner-take-all’ effects are possible.
Microeconomic effects of B2B e-commerce
The economic impacts of B2B e-commerce are the same as for
B2C e-commerce. More transparency and higher efficiency may
result in lower prices. In competitive markets, the lower procure-
ment costs of firms also cause consumer goods prices to drop,
cpb Report 2002/3
thereby promoting higher welfare.
B2B e-commerce can have a strong impact on business mod- (depending on the industry). The average decline in GDP prices
els. There has been considerable growth in the number of e-mar-
ketplaces and private exchanges. E-markets are public electronic
marketplaces, such as the automotive parts exchange Covisint,
that bundle the demand and supply of individual firms for a spe-
42 cific good or service. Large companies, such as Philips, Wall-mart
and Cisco, have private exchanges that allow selected suppliers to
get orders directly in line with the sales of these companies.
At e-marketplaces, the transparency-effect of e-commerce
dominates; at private exchanges, the efficiency-effect has the
upper hand. The advantage of ‘private exchanges’ for large compa- results of the Goldman Sachs study should be interpreted with
nies is that they reveal sensitive sales information to only a small
group of suppliers – and not to rivals. Furthermore, firms do not
have to change their existing software systems and can invest in
integrating logistics – of both the firm itself and the suppliers – in
order to improve the efficiency of the supply chain. In this way a
‘private exchange” can offer a competitive advantage for a firm.
Therefore, private exchanges may prove more successful than
e-marketplaces. The Economist (May, 19th 2001) estimated that
$ 20 billion of goods and services were traded on the private
exchanges of General Electric in 2001, more than on all public e-
markets together.
Macroeconomic effects
In the short-run, efficiency gains and greater transparency may
produce lower prices and higher output. In the long run, the
growth of gross domestic product (GDP) is determined by the
growth in labour supply and the growth in labour productivity.
Improvements in efficiency due to the adoption of network tech-
nology can boost macroeconomic productivity growth during a
period of rise in e-commerce. However, it is uncertain whether
during a transitory period such a rise will lead to acceleration in
productivity growth, because older technologies may no longer
increase productivity.
A recent report of the US Department of Commerce (2002)
states that the continued strong productivity growth during the
economic downturn of 2001 suggests that US industries are con-
tinuing to benefit from past and current investments in IT equip-
ment, software and services, and related human skills.
Goldman Sachs (Brookes and Wahhaj (2000)) assessed the
macroeconomic impact of e-commerce. According to analyst esti-
mates, the potential gains of B2B e-commerce via lower procure-
ment costs range between 2 and 40 percent of total input costs
in the US, Japan, Germany, France and the UK resulting from this
input price shock is 3.6% (using an input-output framework with
no output effects, and ignoring the timing of the effects). In the
long term, this shock could boost GDP in the major industrialised
countries by almost 5%, just over half of which comes through in
the first ten years. So, annual GDP growth in the large industri-
alised countries could rise 0.25% a year during this decade. In the
long term, the effect on prices is less substantial than the primary
effect because of the induced higher demand. Of course, the
great caution.
Sectoral effects
A rise in e-commerce can have quite different effects at the indus-
try level. Inter alia, the sectoral effects depend on the kind of
goods and services produced by a sector, the position of a sector in
the supply chain, the features of the production process and the
intensity of competition on relevant markets.
Researchers at the University of Texas (2001) made a useful
conceptual framework for the Internet economy that takes
account of the interrelatedness of branches of industry. The
framework breaks down the Internet economy into four layers.
The first layer is the Internet infrastructure layer, which offers the
physical infrastructure for e-commerce. It consists of telecommu-
nication companies, Internet service providers and manufactur-
ers of end-user network equipment. On top of the physical infra-
structure, layer two builds the Internet applications infrastruc-
ture. This layer includes the consultant and service companies
that design, build and maintain all types of web sites, from portals
to full e- commerce sites. Layers one and two enable economic
activities on the Internet and mainly consist of the ICT sector.
Thus, the ICT sector will primarily benefit from the rise in
e-commerce.
Economic activities on the Internet are divided into the last
two layers: electronic intermediaries and online transactions.
Internet intermediaries increase the efficiency of electronic mar-
kets by facilitating the meeting and interaction of buyers and sell-
ers over the Internet. They play a crucial role in filling informa-
tion and knowledge gaps, i.e. in lowering search and transaction
costs. This third layer includes market makers, online travel agen-
cies, online brokerages, content providers and online advertising.
The fourth layer includes companies that generate sales of goods
and services over the Internet. E-commerce constitutes a new
sales channel, alternative to conventional retail technology. So,
displacement of traditional businesses is possible, especially in
wholesale sales and retail trade. However, traditional businesses
can choose a multi-channel sales strategy. For example, one of the
most successful Dutch e-tailers is an old mail-order company.
Furthermore, manufacturing firms may supply their goods
directly to consumers, without the mediation of wholesalers and
retailers.
The ‘Texas model’ uses a narrow definition of e-commerce.
When a broad definition is adopted, the fourth layer contains all
Figure 2 The Internet economy
Layer 4 : E-commerce activities
a. industries with new business models
b. industries facing strong changes in market conditions
c. industries only achieving cost savings
Layer 3 : Intermediaries
Layer 2 : Applications
Layer 1 : Internet infrastructure
users of network technology and is the main part of the economy.
The ‘Texas model’ can be further extended by taking into account
the differences in the impact of network technology between
branches of industry in the fourth layer. For instance, in informa-
tion-intensive industries the business model can change com-
pletely because of new services. In other industries the core busi-
ness may not alter substantially, although the use of network tech-
nology may incline cost savings. Some of these industries may
also face market changes because of more transparency and
intensified competition.
Concluding remarks
Fierce competition will force firms in many markets to improve
efficiency. One way for firms to achieve greater efficiency is
through e-commerce, which, although still in its infancy, has the
potential for huge growth, particularly between firms. Especially
cpb Report 2002/3
private exchanges offer a great opportunity. To achieve these effi-
ciency gains, firms will have to make strong investments in ICT
and reorganise their operations. Consumers, still concerned
about quick and appropriate delivery of Internet orders and fear-
ing abuse of personal information, may hamper a strong growth
of B2C e-commerce, although low prices and convenience may
stimulate Internet sales. 43
A surge in e-commerce may boost macroeconomic growth
and reduce inflation during a transitory period, if markets func-
tion well. Large sectoral effects are also possible.
References
Bartelsman, E.J. and M. Doms, 2000, Understanding productivity: Lessons from longitu-
dinal micro data, Journal of Economic Literature, vol. XXXVIIII, pp. 569-594.
Brookes, M. and Z. Wahhaj, 2000, The shocking economic effect of B2B, Goldman Sachs
Global Economics Paper no. 37.
Damme, E. van, and B. Dellaert, 2001, E-conomy: ICT and the functioning of markets (In
Dutch: E-conomie: ICT en marktwerking), CentER, Tilburg, March 2001,
http://cwis.kub.nl/~few5/center/staff/vdamme/ictfinbe.pdf)
Friberg, R., M. Ganslandt and M. Sandström, 2000, E-commerce and prices - theory and
evidence, SSE/EFI working paper no. 389.
Janssen, M.C.W. and J-L Moraga, 2001, Competition and use of Internet (In Dutch:
Concurrentie en Internet-gebruik), Maandschrift Economie, vol. 65, pp. 283-301.
Performance and Innovation Unit of the Cabinet Office, 1999, e.commerce@its.best.uk,
(http://www.cabinet-office.gov.uk/innovation/1999/ecommerce).
Shapiro, C. and H.R. Varian, 1999, Information rules, A strategic guide to the network
economy, Harvard Business School Press.
 Statistics Netherlands, 2002, The Digital Economy 2002 (In Dutch: De Digitale Economie
2002), Voorburg.
Tirole, J., 1988, The theory of industrial organization, Cambridge, MA: MIT Press.
University of Texas, 2001, Measuring the Internet economy, (http://www.internetindica-
tors.com).
US Department of Commerce, 2002, Digital Economy 2002,
(http://www.esa.doc.gov/508/esa/DIGITALECONOMY2002.htm).
Notes
1
Performance and Innovation Unit of the Cabinet Office (1999). Instead of e-commerce
according to the broad definition, the term e-business is used more and more.
2
Bartelsman and Doms (2000) assert that there are still large differences in efficiency
between similar firms in the same branch of industry. However, it is possible that compe-
tition will intensify substantially only as the number of Internet buyers reaches a critical
level (Friberg et al. (2000)).
3
This price includes delivery or purchasing costs and search costs, since the price paid by
cpb Report 2002/3
consumers to purchase an item on the Internet includes delivery costs. Therefore, the
comparable price for traditional shopping contains the value consumers place on their
time to get to and from the stores and their other travel costs.
4
In this way, e-commerce may act as a new stimulus for ERP (enterprise resource plan-
ning) and CRM (custom relationship management).
5
Therefore, some researchers (Janssen and Moraga (2001) and Van Damme and Dellaert
44 (2001)) distinguish an optimistic and a pessimistic view on the effects of e-commerce.
Note that this distinction refers especially to the transparency effect of e-commerce, and
not to the efficiency effect. Furthermore, e-tailers compete not only with themselves, but
with old-fashioned retailers as well. Janssen and Moraga (2001) and Van Damme and
Dellaert (2001) also review in more detail the effects of e-commerce in experience goods
and information goods.
Evaluating government
investment plans
Henri Dijkman and Annemiek Verrips*
Abstract
CPB, in cooperation with four other institutes, carried out a
quick-scan analysis for the Dutch government of some 300
investment proposals in the Netherlands in several policy
areas, including transport, physical planning, the environment
and information technology. The projects amount to a total
investment sum of nearly 100 billion euros. The analysis clas-
sified only 10% of the plans as robust, 45% as upgradeable,
and the rest as ‘weak’a.
Examples of robust plans are road pricing to alleviate con-
gestion, a road-safety programme, and some investments in
environmental planning on riverbanks and improvements in
school buildings.
In some policy areas (such as environmental protection),
other policy instruments (such as regulation) seem to be more
effective and efficient than investments. The analysis there-
fore gives some general recommendations regarding more
efficient ways to attain policy goals. The results have been
published in ‘Selective investments: Evaluating government
investment plans’ (only in Dutch).1
a
In the analysis weak projects and projects that could not be analysed because of
insufficient information, are classified in the same category.
Introduction
Public investment is an important policy instrument wielded by
the government to allocate a substantial amount of resources.
Efficient use of the funds available is therefore of considerable
importance. While on a general level the literature provides a
number of criteria by which to judge the efficacy of public invest-
ment, the actual selection of projects is not always an easy task.
Which projects regarding roads, railway tracks, nature reserves,
* For more information, contact Annemiek Verrips (tel: +31-70-3383493;
e-mail: a.s.verrips@cpb.nl). Henri Dijkman is momentarily working at the Council for
Housing, Spatial planning and the Environment (VROM-Raad) in The Hague.