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Re-Intermediation and Deferment through E-Commerce 21




Chapter II



Re-Intermediation
and Deferment
through E-Commerce:
Neo-Austrian
Interpretation of
Capital and Time
Parthasarathi Banerjee
NISTADS, India




Abstract
Contrary to the common belief that e-commerce disintermediates”or even while
reintermediation takes place the economic circuit fails to get lengthened”this chapter
argues following the Austrian perspective, that through e-commerce consumption gets
deferred and the economic circuit lengthens. Inappropriate use of transaction cost
theory, in particular, has often weakened the received theory. This implies that e-
commerce increases capital because capital is time according to the Austrian theory.
Consequently the efficiency-focus of received theory is replaced by a capital-enhancing
theory of this new commerce. Several novel functions of intermediaries including
coordination have been utilized to support the departure from the efficiency perspective.
Citing several well-known examples from the literature has adumbrated this argument.



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22 Banerjee


Introduction
It is commonly believed that electronic commerce (Ecom) reduces intermediation and the
time in a business circuit. Several authors have argued that dis-intermediation resulting
from the use of Ecom increases economic efficiency and reallocates resources better.
Alternatively, transactions cost economics (TCE) theorists argue that electronic com-
merce decreases transactions cost by way of reducing the distance between the
producers and the customers. Proponents of increasing economic efficiency through
dis-intermediation in electronic commerce have employed TCE as well. We argue from a
Neo-Austrian perspective contrary to this efficiency theory of dis-intermediation and of
quickened money that this efficiency perspective is limited to technological changes
alone (Baumol, Panzar & Willig, 1986). In so far as Ecom is purely technological there
would be gains in economic efficiency arising out of changes in technological relations.
However, mediation in the market is only limitedly technological. Mediation refers more
to the market microstructure. Moreover, Ecom can affect efficiency through means other
than dis-intermediation.
In contrast, we argue that efficiency fails to increase rate of profit or the pace and spread
of innovations. For us, intermediation refers to not just a certain value chain, such as a
typical SIC industrial segment. Contrarily, intermediation goes beyond a market segment
to the depth of market microstructure (O™Hara, 1997) to provide for coordination
(Richardson, 1960, 1972, 1998) in two modes; first, amongst the competitors (including
potential competitors and complementors), and second, between the producer and its
consumers. Efficiency perspective refers to the continuation of the same basic structure
of intermediation but accentuated and hastened through elimination of several mediatory
links. We argue contrarily from the Austrian perspective that Ecom transforms the
intermediation structure in order to afford higher coordination, higher capital and
increased rate of profit”and all this by virtue of a new market microstructure of
intermediation. Ecom is an innovation in trade and linkages in an economy and we would
argue that it substitutes the previous intermediary-based value chain by a new coordi-
nation across several value chains and specifically along the scope dimension (North,
1989). It appears that this commerce ushers the economy to a new institutional mooring.
This innovative coordination is afforded by generation of new and novel cybermediaries
(Sarkar, Butler & Steinfeld, 1995). Further, Ecom brings in several layers of possible
intermediaries such as the virtuals and the aggregators, and as a result tends to keep
transactions incomplete. This significant departure from transactional completeness to
incompleteness forces deferment of consumption and consequently increases capital
and the period of production. It extends the completion of transaction indefinitely and
thereby Ecom, instead of shortening the business circuit, the proverbial value chain,
would extend such a circuit indefinitely along both vertical and horizontal dimensions.
Indefinite extension of business circuits, that is, the lengthening of business transac-
tions, increases effectively the period of production. We argue that the lengthened
circuit or the period of production necessarily demands more intense cooperation than
what could be provided by the simple value chain intermediation. Noticing that Austrian
theory recognizes capital as time that is as the period of production, we can recognize
that Ecom enhances capital twice, first by lengthening the period and second by



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Re-Intermediation and Deferment through E-Commerce 23


deepening coordination. This theory argues that a longer period of production implies
a potentially higher rate of profit and an increase in capital. Based on this theoretical
stance we argue that Ecom enhances capital and increases the rate of profit by
lengthening the circuit of transaction through a mechanism of deferment of consumption,
known otherwise also as the period of production. Lengthening of period comes through
re-intermediation and through increased deferment of consumption.




Background
Ecom and the diffusion of information technology, in general, have been believed to
contribute to transformation of value chains internal to a firm and to an industry (Porter,
1985). Such a value chain recognizes the vertical dimension and refers to an industry
segment. It was argued (Malone, Yates & Benjamin, 1987) that consequent to transfor-
mation of inter-linkages there would be dis-intermediation or the shortening of the circuit
in the market. A comparison between the two modes of reaching customers seemed
inevitable (Brynjolffson & Smith, 1999). It was believed that the end result of dis-
intermediation would be added value to customers and to the producers. This belief was
strengthened by an additional belief in the disutility of a trader. A trader was looked down
upon as an irritant causing disruptions and adding significant costs (Benjamin &
Wigand, 1995). The trader did not seem to have any contribution to make to the market
microstructure. This argument concludes that intermediation could be terminated alto-
gether thus offering to both producers and the consumers additional value through
effects such as direct sales, in particular by a dominant producer commanding price or
quality (Bailey & Bakos, 1996). This hypothesis of threatened intermediaries, as Sarkar
et al. (1995) coined it, is based upon a certain reading of the theory of transactions costs
economics (TCE) (Williamson, 1975, 1985; Coase, 1990). Another approach though not
far off from the TCE is agency theory, used by Picot, Bortenlanger and Hohrl (1997) to
argue that principals henceforth armed with additional information would either dispense
away with most of the services hired till date from the agents or, would design stronger
and more effective system of incentives and monitoring. This would enable the principal
to minimize upon the costs of monitoring and hence agents, such as all the intermediaries,
would become obsolete.
Possibly Sarkar et al. (1995) were the first to indicate that intermediations would possibly
increase. They renamed such mediations as the cybermediaries. They argued that the
proponents of dis-intermediation employed a flawed TCE logic, the latter properly
employed would show that mediation must increase in Ecom. In subsequent years
empirical studies on the extent of cybermediation by a large number of contributors have
pointed out the increasing incidences of mediations (Giaglis, Klein & O™Keefe, 2000;
Burton & Mooney, 1998; Meck, 2001; Domowitz, 2001; Chircu & Kauffman, 2000; Story,
Straub, Stewart & Welke, 2000). The key paper by Sarkar et al. employed TCE to argue
that intermediation would possibly increase consequent upon introduction of Ecom.
Most contributors agreed to this formulation by Sarkar et al., and these contributions
have enriched the argument based upon TCE. The transactional logic employed has



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24 Banerjee


identified mediation as one component in the value chain necessary to reduce the
otherwise high costs of transactions.
Issues have been conflated here, however. Accounting costs have wrongly been
assumed to represent the costs of transaction. TCE argues (Williamson, 1975) that
transaction costs arise because parties in an exchange behave opportunistically. The
cost necessary to overcome opportunism or in other words, costs borne to protect
property rights when an opportunistic exchange partner is faced (Barzel, 1989) is known
as the transaction cost. It follows that in Ecom where parties may not transact repeatedly
or do not have trust such transactions costs will rise instead of disappear. Coase™s (1990)
theorem shows that formation of a firm alone can force costs of transactions to remain
limited. In other words TCE would demand either the birth of a firm or the birth of trusted
intermediaries. The former implies that Ecom will cease to operate because vertical
integration or appearance of firms would take place. The latter, close to most of the TCE
proponents of cybermediation, shows that mediation possibly now through new part-
ners will necessarily remain following introduction of Ecom.
Schmitz (2000) takes up agency theory to defend the thesis that mediation will remain or
else increase following introduction of Ecom. Fallacy in Sarkar et al.™s (1995) approach
is that mediation has been considered as a singular service. Schmitz, in contrast, argues
based on agency theory and the theory of market microstructure that mediation has
multiple aspects. Three aspects have been considered and these are: first, to hold
inventory in order to service immediacy and insurance; second, to reduce asymmetric
information by building reputation; and finally, to gather, collate and disseminate
information on the market. Schmitz argues further that intermediation in Ecom does not
increase marginal cost to the principal (the producer) and the intermediaries must
produce the three types of services jointly, that is the market in lieu of having three
different types of intermediaries would have only one type.
Sarkar et al. (1995) indicated that Ecom necessarily engenders mediation in the following
areas of search and evaluation, needs assessment and product matching, customer risk
management, product distribution, product information dissemination, purchase influ-
ence, provision of customer information, producer risk management, and transaction
economies of scale and for integration of customer and producer needs. This detailed
listing appears to cover the three modes described by Schmitz (2000). Meck (2001), for
example, indicates three groupings of cybermediation, which are aggregation of buyer
demand and seller products, searching and matching, and pricing and facilitation.
Domowitz (2001) similarly applying the TCE logic vindicates reintermediation in Ecom.
Most authors applying the TCE agree to the emergence of certain broad types of
mediation. What, however, seems to be missing in this discussion is the relevance of
increasing returns and the consequential restructuring in industrial segments that are
adopting Ecom.
Restructuring through the cycle of intermediation followed by dis-intermediation and
finally through cybermediation has been underscored as exogenous. The basic teaching
from studies on increasing returns suggests, however, that a pull in demand on the
structural elements in a market has a cascading effect. This cascade pulls through the
economic inter-linkages across not only segments along a vertical direction but more
often and more vigorously across the direction of scope (Richardson, 1996, 1997, 1998).



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Re-Intermediation and Deferment through E-Commerce 25


As a result, novel divisions of labor and novel microstructures of the market appear
especially along the scope linkages (Katz & Shapiro, 1985; Silver, 1984). Such structures
in turn demand further employment of information technology for linkages and for
transactions. This cycle of increasing and synergistic spawning of divisions in market
and in the diffusion of Ecom thus displays increasing return. Ecom consequentially
restructures the previous market arrangement along directions of scope, and therefore
the cascading effect of restructuring can be felt through a large number of interrelated
industrial segments subsequent to introduction of Ecom in a lone segment. Contribu-
tions by previous scholars sadly missed this point of both lengthened intermediation and
the cascading effect of restructuring following Ecom along markets other than where it
was initially introduced. This re-intermediation in other markets is of great consequence
since they alter very significantly structures and interrelationships amongst markets.




Evidences and Departure to a New
Theory
Evidences of re-intermediation are in plenty. There are, however, other related changes
in the market, such as in the emergence of a novel framework of liability (Valimaki &
Martikainen, 2001), or the emergence of new relationships between the wholesaler and
the retailer (Nettesine & Rudi, 2000), or in offerings of greatly dispersed prices (Pan,
Ratchford & Shankar, 2001). Several databased searches and research on price offerings
on the electronic commerce have shown that prices offered on Internet are often not lower
than other modes of retail sales. Internet pricing has shown personalized effects based
on quality differentiation and on personalized offerings. Ecom offerings have been
compared to mass customization (Wind & Rangaswamy, 2000), necessitating the spawn-
ing of very large number of novel intermediaries. Technology has allowed firms to
identify and track customers, on the online stores as also on Web sites. Firms now can
create individual consumer profiles matched by all other relevant information on choices,
demographics, cultures, and preferences. Internet retailers can deploy complex pricebots
and can effectively discriminate price offers based on such profiles of preferences, etc.
Ecom has thus opened up the possibility of offering extremely variegated personalized
pricing. This forum can also offer equivalents of typical marketplace bargains. It follows
logically that retail offers on Ecom cannot disintermediate and eliminate stages of
intermediation necessary to gather market and competitive intelligence. Market clearing
in Ecom therefore necessarily requires a very large increase in information transacted and
processed (Aoki, 1990). These in turn demand services from new entrepreneurs offering
specialized facilities for search and offer. Ecom market thus increases the market along
the dimension of scope.
Along with personalization of pricing, the electronic retailer can now design its product
offers on personalization of the qualities of the products. This results in offers of
extremely variegated products, which in turn calls for revolutionary changes in the entire
system of production that once through Tayloristic mode had developed along the line
of corporatization and mass production of mass-standard goods. Mass customization


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26 Banerjee


and co-production of a new product offered especially through cooperation along the
direction of scope have increased enormously the number of products on offer. Co-
development of products by a group of competitors™ complementors or collaborators in
association with current or potential customers and the strategy of producing products™
versions have catapulted previous industrial vertical segments into a jumbled up flux of
cross-connected firms. Expansion along scope direction has deferred consumption of a
good. Consequently the period of production has increased. This expansion has created
numerous linkages or mediations along the scope axis before a product can be consumed.
Expansion along vertical organization consumes a product necessarily earlier than
through expansion along scope-axis.
Production organization of a vertically integrated corporation stood upon standardiza-
tion. Production of apiece products with variegated quality, chosen often by the buyer
herself, demands that the entire chain of logistics and the supply chains get linked to the
electronic commerce platform and that the stages in production are increased immensely
and at each step of production each apiece product contains unique information. This
has resulted in enrichment of information and subsequent differentiation of previously
firm-internal business activities. This is a classic example of increasing return-based
expansion in divisions of labor. Such a picture of electronic-commerce-led economy
shows that stages of production must increase, that different economic agents must
undertake each stage especially to take care of the need for insurance and for generation
of asymmetric information appearing often as specialization, that variability must
increase and that mass production of personalized wares must hasten. In short, electronic
commerce demands that an economy increase both its division of labor and the long
period of production.
Velocity of money or goods in an economy refers to technical efficiency. This efficiency
refers to particular states of affairs of technology. Enhanced efficiency and finally
efficiency-equalization in the equilibrium must refer to a static picture of unchanged
structure. Increasing return in association with continuous innovation in production and
trade stands upon a dynamic equilibrium (Richardson, 1996). Such a dynamic equilibrium
necessarily implicates structural transformation of the market and its microstructures. As
a result, the efficiency perspective by remaining structurally contained and constrained
fails to explain why such technological states do change or why certain particular
economic agent reap in profit. Moreover, efficiency theorist™s “profit” is actually a rent
earned. Profit, however, is speculatively earned. Surprise must be a cornerstone in profit
making. Efficiency theorists fail to underscore how electronic commerce brings about
novelty and surprises in the trade and commerce.
Interpreters of TCE have assumed that Ecom brings about a frictionless (Brynjolffson &
Smith, 1999) or transactions-cost-free market. They have wrongly committed TCE to such
an explanation and this is my first objection. Second, reduction of transactions cost
would increase efficiency and would not increase the rate of profit or capital and would
not hasten innovation. About my first objection I must point out that TCE refers not to
an accounting cost in an economy, instead it refers to cost due to opportunism or due
to increased difficulties in protecting one™s property rights. Cost of information is an
additional element. Therefore TCE proponents of electronic commerce wrongly refer to
accounting cost. Moreover, we would argue that Ecom couldn™t reduce opportunism



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Re-Intermediation and Deferment through E-Commerce 27


either inside a firm or in an economy. It follows then Ecom would in all likelihood increase
transactions cost. Regarding the second objection, TCE refers to the efficiency that an
organization or firm achieves in transaction costs when this firm replaces the erstwhile

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