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has a considerable variety of forms. It includes, among others, work of employees of a
company away from the workplace (part-time or full-time, at home or in another places,
such as tele-centers), home-based work freelancers, home-based part-time or temporary
work as a secondary activity and, in recent times, mobile working, made neither in the
workplace nor at home (or tele-center). Early research indicates that so-called telework
centers may boost productivity. To cope with the high price of commercial real estate and
the shortage of information technology workers, many companies are opening outpost
offices in different countries. Each office has a conference room equipped with three large
video screens so programmers and engineers can collaborate from remote locations.
However, there are various serious social effects of telework. E-commerce has far
reaching implications in a social context. On one hand, it provides all the comfort of
shopping from home, on the other side, it removes old-fashioned human interactions for
social needs (Gershuny, 2000).
The chief problem appears to be the fear of losing touch. Telecommuting could be seen
as a different social class with a different set of rules. The fact that traditional workers
could be seen as failures in such a society further increases rifts between social classes.
As Internet use grows, it is observed that workers spend less time with friends and family,
shopping in stores or watching television, and more time working for their employers at
home ” without cutting back their hours in the office. The more hours people use the
Internet, the less time they spend with real human beings (Kraut et al., 1998). More people
are working at home on the Internet for their employers and are working more hours at
home since they gained Internet access without cutting back at the office, actually
reporting increases in time spent working both at home and at the office (Gershuny, 2000;
Heikill¤ et al., 1998).
E-commerce makes it possible for an older consumer to purchase almost all needs from
home and have those items delivered. But this can lead to social isolation. The only time
there is any personal contact in this situation is when the consumer signs for the
packages and when they call up customer service. Due to such phenomenon, there are
fewer people active in their neighborhoods than in the 1960s. Many researchers are trying
to find answers by working on various issues, such as: How might online communities
help reverse this trend? How can local neighborhoods, street corners, apartment
buildings, school playgrounds, etc., be turned into bustling, chattering communities
where people feel connected and care about others? Random encounters in chat rooms
are not enough. Continuing collaborations are needed that encourage trust and collabo-
ration in local health groups, community groups, parent-teacher associations, local
conservation groups, community activists or political action groups. Hopefully online
communities of the future will help reduce social isolation, enrich local neighborhood
communities and encourage development of social capital. Corporate cultures that are
traditionally strengthened and reinforced through informal discussions of stories, ritual
and specialized language can no longer be maintained. Therefore, geographic dispersion
is the primary factor contributing to a weakened culture.
Another issue is ensuring the safety standards of tele-workers. Some feel that an
employer should be responsible for preventing or correcting hazards in a home office,
passing an unprecedented burden of liability onto the employer. Employers must take
steps to reduce or eliminate any work-related safety or health problems they become



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permission of Idea Group Inc. is prohibited.
Socio-Economic Impacts and Influences of E-Commerce in a Digital Economy 9


aware of through on-site visits or other means. But determining how much responsibility
an employer has for a tele-worker™s home office is unclear. Should an employer be
responsible for making sure a tele-worker™s office is ergonomically sound or for
snowplowing services on the porch and driveway of a traveling salesperson™s home?


Loss of Individuality

Maintaining a customer base has become a very important asset in today™s economy for
the organizations to gain competitive advantage. Therefore, organizations use sophis-
ticated tools to reach customers and get their personal data recorded into their databases.
Many believe that e-commerce technology is eroding personal privacy because consum-
ers have no control over their personal data that merchants have collected during their
shopping experiences. Also, personal record keeping systems of merchants are not
regulated or restricted. People fear that if the trend of collecting information continues,
they may lose their individuality since they would have no control over the information
about them (Kling and Linowes, 1996; Hatch, 1996).
The Internet expands our experience of community. This expansion challenges tradi-
tional notions of the community and the individual. The Web provides so many
manifestations of individuality that it causes an inflation of individuality. Individuality
is no longer a definition of who we are, which was won the hard way, through explorations
of the social and economical boundaries of survival. Individuality is more and more a
definition of who we are, which was acquired through countless hours of mediated
experiences through television and the Web. An important component of the sociologi-
cal implications of the information age is that the breaking down of distances that is at
the heart of the process should not be allowed to impinge on the essence of individuality.
There is clearly the need to ensure that an electronic counterpart of physical individuality
is evolved so that there is a true breaking down of distances without a loss of identity.
There is already wide recognition of such a need across the world and various efforts are
in place to create such e-identities (Miyazaki and Fernandez, 2000).


Privacy

The transition from the Paper Age to the Digital Age has brought with it new issues
surrounding the usage of personal information. Privacy has now become a major issue
internationally. The rise of intrusive technologies and the Internet has resulted in a surge
in awareness about the importance of privacy. Pressure is being put on companies to
develop privacy policies to protect consumers who are liberally sharing their personal
information in this new environment (Miyazaki and Fernandez, 2000). The rush by large
corporations to engage in electronic commerce has meant more personal information is
being gathered, shared, sold, and disseminated than ever before. However, the privacy
issue moves far beyond protecting personal information on the Internet. In a larger sense,
our privacy is being violated daily as new and all encompassing surveillance technolo-
gies come on the market. It is also clear that the emergence of ever pervasive and intrusive



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permission of Idea Group Inc. is prohibited.
10 Sharma


technologies is representing a threat not only to privacy, but also to fundamental
freedoms as citizens. We are building mechanisms and accepting them by allowing their
implementation and use, in which we are, virtually, potentially building an electronic
prison for ourselves. The potential mechanisms to diminish our basic freedoms are now
being put in place (Ambrose and Gelb, 2001).
Technology has meant a wide-scale loss of privacy in comparison to what we enjoyed
just 20 years ago. It is not just our personal information that is being abused. We are
subject to almost daily scrutiny of our lives. In most countries, video surveillance
cameras are accepted as a way of life to combat crime. Computers can now talk to other
computers and, if properly programmed, can exchange information between machines
automatically. Computers can monitor every aspect of our online activities. In the work
place, electronic monitoring of employees is not unusual. In many corporations, it is
becoming a standard practice in the name of administrative efficiency. Geo-positioning
satellite (GPS) technology can now send email, faxes and messages to our pagers and,
now, even to our cars. But that same technology can also pinpoint exactly where we are
at any given time of the day. Whether we are in our car and just a short walk away from
where we parked, someone somewhere will be able to know our location. This is just
another bit of information that will end up somewhere in a database for possible current
or future use by someone. Employers can monitor every aspect of employees™ movements
through these technologies. All of this will be in the name of administrative efficiency,
monitoring productivity and being cost-effective. In time, governments will find persua-
sive reasons to also monitor our activities. It appears that society is whistling cheerfully
as we descend willingly into the fast approaching dark tunnel of encroaching technologi-
cal tyranny. The threats to our freedoms are even wider than ever imagined (Gupta and
Sharma, 2001; Zaret and Sawyer, 2000).


The Impact of E-Commerce on Local, Social, and
Political Values

E-commerce may have a significant, impact on local political and social life and on local
values such as privacy, freedom of information and the right of free speech. Commerce,
particularly local commerce, is a social activity that promotes community connections,
reinforces community values, establishes community identity, and supports community
development. Telecommuting or virtual mobility of labor permitted by global networks
can have significant effects on policies, institutions, and social patterns”regional social
infrastructure (e.g., housing, health care, and transportation), immigration law, dress
standards, eating habits, and others. In the United States, with its many local tax
authorities and its heavy dependence on sales tax to run local government, a significant
shift from local to Internet commerce would have serious ramifications. On the face of
it, this would put local businesses (which are taxed) at a competitive disadvantage, and
it would certainly reduce the funds available for local social services. One interesting
possibility is that the United States may respond to these pressures by moving toward
a European-style, value-added tax.




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Socio-Economic Impacts and Influences of E-Commerce in a Digital Economy 11


Economic Impacts and Influences on
E-Commerce
The promise of significant economic growth places electronic commerce high on many
public and private sector agendas. Starting from basically zero in 1995, it is predicted to
reach $1 trillion in 2003-05 (IDC, 1999). On the other hand, it could have significant effects
on the structure and functioning of economies at the firm, sector and aggregate level. The
impacts of these changes are diverse and likely to impinge on prices, the composition of
trade, labor markets and taxation revenues. Adapting policy frameworks and institutions
to these changes and ensuring that the full potential benefits of e-commerce are reaped
will pose a number of challenges for structural policy. This section provides an overview
of these issues.


Organizational Changes of Enterprises

E-commerce can influence the process of governance in various ways and in varying
degrees, from improving the current mechanisms of delivery of services to transforming
the entire mechanism and the nature of services themselves. The role played could be:
1. Purely technical in terms of automation of tedious tasks earlier done by humans,
2. To a facilitating/supportive role leading to more participatory and all-encompass-
ing decision-making and implementation processes,
3. To a completely innovative role that involves new services and new mechanisms
to deliver these services.


E-commerce can lead to increased participation, inclusion and integration on one hand
and increased marginalization, loneliness and exclusion from information and communi-
cation on the other.
All enterprises face internal as well as external changes due to the emerging e-commerce
technologies. They influence the way in which enterprises position themselves in the
market and the way they collaborate with others. These new technologies have conse-
quences for intra-organizational changes of production and working issues. The imple-
mentation of modern ICTs creates impacts on business relationships with partners and
concurrently, the internal and external enterprise organizations with regard to its
competitiveness. For any organization, the adoption of an e-commerce strategy generally
entails redefining its value chain and re-engineering internal functions and processes to
adapt to and benefit from the new information systems implemented. The dramatic
changes in the way information flows throughout the organization deeply affect its entire
value chain. A shift of importance of single functions of an enterprise is to observe. Value
is shifting from production to product development, procurement, sales and marketing,
and the provision of after-sales services. These are also the areas where e-commerce
solutions are going to play a vital role in increasing companies™ collaborative capabilities
with partners along value chains. Co-operation motives can be cost and risk reduction,


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permission of Idea Group Inc. is prohibited.
12 Sharma


knowledge transfer or just the reduction of time to market. Unfortunately, costs are still
the main incentive for business activities or even the reason to shut down business
activities. Reduced expenditures due to lower charges can be directly used in marketing,
research and development, etc. In cooperation, enterprises can exploit the better cost
position of the partner or use economies of scale.
Through the new possibilities of electronic collaboration and IT-supported production,
it is expected that productivity will comparatively grow with the introduction of new ICT
technologies. ICT technologies are becoming an important part of business processes
and have become indispensable to stay competitive in new market constellations. They
are necessary to reduce time to market, to find the best offer with the best price and most
suitable partners for one™s business. Productivity is the relationship between output and
input. It should be viewed as value adding in addition to optimizing. It is a total concept
that addresses the key elements of competition, i.e., innovation, cost, quality and
delivery. Therefore, an increase in productivity can be achieved by enhancing the value-
added content of products/services, or by decreasing the unit cost of production, or a
combination of both (Uzzi, 1997).


E-Commerce and Local Businesses

Whitten and Steinfield show that as electronic commerce grows, it will create an important
socio-economic side effect which will be increased competition with the traditional
businesses in any given local community (Steinfield, Mahler and Bauer, 1999a; 1999b).
Their study indicates that although local businesses may gain from the efficiencies
afforded by electronic commerce, both in better serving their local constituencies and
by reaching out to distant markets. In general local merchants are ill-prepared to take full
advantage of electronic commerce due to various reasons, and thus are unlikely to see
gains from it (Steinfield, Mahler and Bauer, 1999a; 1999b).
Distant Web-based businesses have several advantages over their local physical
businesses. Based on Steinfield et al. (1999a; 1999b), such advantages include, but are
not limited to: access to a wider potential market; lower sunk costs because a building
or rented space in each market is not required, and they may operate with less or no
inventory; better economies of scale arising from a larger customer base, and consequent
volume discounts on inputs; lower costs due to the ability to bypass many of the
intermediaries in the retail distribution value chain (Wigand and Benjamin, 1995; Wigand,
1997); a higher degree of transaction automation, leading to improved service and lower
labor costs and the ability to rapidly respond to changes in the market through price
adjustments which can be almost in real-time (Bailey, 1998), as well as changes in product
mix and marketing approach. These economies can potentially enable Web-based
retailers to easily undercut the prices of local retailers who formerly faced little or no
competition. Using transaction cost theory, one can conclude that electronic commerce
implies new competition for local retailers, particularly those offering products that are
readily obtainable from other sources, and that are easily transported (Steinfield and
Whitten, 1999; Steinfield et al, 1999a; 1999b).




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Socio-Economic Impacts and Influences of E-Commerce in a Digital Economy 13


Community-Level Impacts of Electronic Commerce

E-commerce has many positive influences at the individual level whereby local buyers
gain more value and greater access to suppliers. However, the results at the aggregate
community level may be undesirable for local residents. Some of the community-level
social costs of electronic commerce are: job losses, particularly in relatively unskilled
areas already quickly disappearing in the digital economy; loss of local shopping options
that, even with higher prices, afforded some conveniences; decreased attractiveness of
the local community due to the loss of boutiques or other businesses that enhanced the
quality of community appearance and life and reduced tax income from business,
resulting in a reduction in the ability to fund government services that enhance
community life (Whitten, 1999; Steinfield et al., 1999a; 1999b).
Clearly not all communities will be affected equally. Some may even find that electronic
commerce leads to significant growth in jobs, tax revenues and service levels. Larger
communities may be less vulnerable for a number of reasons. They may have more
competitive local business, and their larger population may make the effects of any loss
in business less noticeable. Community culture may play a role, such as university towns
having more Web-savvy consumers. The nature of the local economy ” for example, a
prevalence of firms in high-tech vs. heavy industry vs. services, such as tourism ” may
also influence the relative attractiveness of Web commerce and the vulnerability of local
businesses. Even the extent to which a community is geographically isolated, influencing
the availability of nearby businesses within driving distance, and the resulting competi-
tiveness of local firms once they are exposed to Web competition, can be a factor
(Steinfield and Whitten, 1999; Steinfield et al., 1999a; 1999b; Choi et al., 1997).


Bundling or Tying Arrangements

E-commerce offers opportunity for building or bundling several products and services
together. Many companies now offer a complete package of trading, information,
logistics and supply chain management services. The bundling of such products and/
or services may provide a convenient solution for buyers, and a way in which competing
service providers can differentiate their offerings to attract more customers. In some
cases it may also be a more efficient and economical way to provide both products and/
or services, resulting in lower prices and promoting the development of a new competitive
product or service. On the other hand, this may arise between competing outlets “
particularly when some outlets are independently owned and operated but others have
vertical links with manufacturers. Some wholesale operations could be squeezed out or
replaced by Internet intermediaries. Potential issues may include:
• Suppliers refusing to deal with independent offline or online distributors because
they have developed their own online retail Web sites;
• Suppliers refusing to deal with independent online distributors; and suppliers
discriminating between price and quality or quantity of goods distributed via
online and offline distribution channels.



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14 Sharma


E-commerce may have an impact on existing franchising arrangements, particularly where
contractual terms provide for territorial limits. Many businesses may have entered into
franchising arrangements on the understanding that they would have exclusive territorial
rights, whereas for certain types of goods, e-commerce transcends global boundaries
and thus would create a problem for franchising arrangements if these are territory-based.
Also, in the new environment of e-commerce, franchise products will face competition
both locally and globally.


Impact on Tax, Trade and Regulatory Policies

E-commerce has a strong impact on taxation and tax policy. Concerns have been
expressed that e-commerce could result in the erosion of tax bases. Consumption taxes
are levied on the principle of taxation at the place of consumption and according to rates
set in individual countries, or in individual states in the case of federal nations. E-
commerce, however, has the potential to undermine the application of domestic and
national tax rules. Tax planning for an e-business differs from tax planning for a traditional
bricks-and-mortar company. Historically, the generation of income depended on the
physical presence of assets and activities. This physical presence, or permanent
establishment, generally determined which jurisdiction had the primary right to tax the
income generated. Because of the growth of electronic commerce, new e-business models
(including digital marketplaces, online catalogs, virtual communities, subscription-
based information services, online auctions, and portals) have emerged. Each allows
taxpayers to conduct business and generate income in a country with little or no physical
presence in that country. The separation of assets and activities from the source of the
income represents a significant departure from historic business models. This change
creates new tax planning challenges and opportunities (Penbera, 1999; Olin, 2001;
Anonymous, 2000; Sharma and Gupta, 2003b).


Impact on Employment and Labor Policy

The growth of e-commerce is likely to have both direct and indirect impacts on labor
markets as well as the composition of employment. Since e-commerce may create more
knowledge-based products, it is likely to drive widespread changes in the labor market,
shifting the composition of workers required to produce and deliver a product or service
(Anonymous, 2000). There will be shifts in the kind of skills needed. Faster rates of
innovation and diffusion may also be associated with a higher turnover of jobs. This may
create more turbulence as workers will need to enhance their skills from time to time . This
may result in reallocation of labor to the changing needs of the economy (Sharma and
Gupta, 2003b; Anonymous, 2000).
One important change due to ICT is occurring in employment within economic sectors.
Changes occur regarding the polarization of wages around skills, demand for specific
qualified work (e.g., replacement of traditional craft and production engineering skills
towards computer design skills), a need for ongoing training, other forms of work



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Socio-Economic Impacts and Influences of E-Commerce in a Digital Economy 15


contracts, and a shift to a smaller core workforce. Businesses will incur ICT costs
including cost of new applications, developer time, software licenses, any hardware or
software, support and maintenance costs, and business costs associated with making
the transition to the new system, etc. The challenge remains to predict support and
maintenance costs for the new technology, business costs associated with making the
transition to the new system and other hidden costs. Considering the fast development
of technological changes it is therefore getting much harder to ascertain the long-term
impact of any technology choice (Penbera, 1999).


Competitive Environment “ Influence on Monopolistic
Trends

Internet-driven e-commerce will have a significant impact on the competitive environ-
ment of commerce. Because in e-commerce the entry cost is low, and transaction costs
are lower, it allows small entrepreneurs to enter the marketplace easily. On the other hand,
e-commerce especially facilitates enterprises whose success depends on network
effects”“winner-takes-all” situations for companies with significant market share”
which further facilitate their growth and market dominance. This effect may create
problems for competition and antitrust policy. Certain players may become monopoly
holders, which will have greater (and dire) consequences for competition. The recent
evidence from Microsoft case has shown that there is considerable potential for
weakening the competitive process. The monopolists will have strong interests in
locking customers into network relationships. The concepts like trust, reputation,
loyalty, pricing and commitment take on new meaning for online business (Uzzi, 1997).
Since e-commerce would transcend geographical boundaries, many big firms of known
brands may not only expand their markets, but also may enter into new business activities
across the broad spectrum of business activities. This may help to reduce the costs and
prices, but it will create the danger of creating an e-commerce monopoly by a few
corporations or networks of corporations. Many firms may use a low-price strategy to
grab the market and eliminate the competition. Several mergers and alliances, in which
two or more firms combine to achieve a large market share and have large economies of
scale, can result in eliminating meaningful competition (Sharma and Gupta, 2003b).


Impact on Prices

Electronic commerce is widely expected to improve efficiency due to reduced transaction
and search costs, increased competition and more streamlined business processes.
Lower search costs may also lead to Internet consumers being more sensitive to price
changes. By reducing search costs and increasing the flow of information, e-commerce
might effectively shift power from producers to consumers and make it harder for firms
to maintain higher prices (Bakos, 1997). However, empirical evidence does not support
this claim in all cases. Brynjolfsson and Smith (1999) found that average prices on certain
items in a particular industry sold through the Internet were lower than their equivalent



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permission of Idea Group Inc. is prohibited.
16 Sharma


purchased through traditional retailers. However, in certain cases prices of goods sold
through the Internet were higher than those charged by traditional retailers. Brynjolfsson
and Smith (1999) justified this phenomenon by arguing that certain reductions in cost are
offset by higher overhead costs elsewhere. They also indicate that increases or de-
creases in price depend on the size of the market (Sharma and Gupta, 2003b).


The Threat to SMEs

The adoption of e-commerce technologies is important for the ongoing survival of SMEs.
The Internet can remove many of the competitive advantages of larger companies and
provide opportunities for smaller enterprises. It can also include a cost-effective way for
SMEs to market their business, launch new products, improve communications and
information and identify potential partners (Sharma et al., 2003). However, SMEs also
have to be aware that the Internet and e-commerce will create more sophisticated and
demanding customers with higher expectations in terms of 24-hour access to company
and product information and quicker responses to information requests.
From a theoretical perspective, small business and rural enterprises can benefit greatly
with e-commerce as they gain access to more customers (even globally) and can even
compete with large businesses since e-commerce is a “level playing field.” Since SMEs
are known for greater internal efficiencies, they may have an advantage over large
businesses. However, recent studies indicate that the adoption of e-commerce by small
business (as either a buyer or supplier in B2B and/or B2C environments) has not been
as rapid as would be anticipated. Reasons cited for this include the cost, technology
hurdles, and lack of expertise. E-commerce demands fundamental shifts in business
strategies, operations and technologies. Many participating SMEs indicated that they
have limited access to information about the business models and technologies that are
the basis of e-commerce success. Lack of knowledgeable staff in SMEs is also respon-
sible for non-adoption of e-commerce. This will result in SMEs being non-competitive
in an e-commerce environment (Auger and Gallaugher, 1997).




Conclusions
As electronic commerce grows, there will be important socio-economic side effects.
Although IT has the potential to reduce disparities between nations, asymmetric access
to its benefits by different sections of society can have far reaching social and economic
implications. Our research suggests that e-commerce technologies are helping organi-
zations, societies and nations to accelerate their socio-economic growth and to provide
more opportunities for businesses to grow, but it has also created many challenges and
effects across numerous domains of society, and poses many challenges for policy
makers. In this chapter we have identified a comprehensive set of socio-economic
variables that are influenced by e-commerce. Further empirical validation could be done
for these variables in different countries.



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Socio-Economic Impacts and Influences of E-Commerce in a Digital Economy 17


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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
market-based opportunistic and costly transactions. Ecom is by definition inter-firm or
inter-agent and cyber mediation of transactions cannot reduce the cost owing to
opportunism. In fact in all likelihood such costs would increase because trust is
recognizably the most intractable problem in this commerce. Increase in efficiency
following reduction in transaction cost, according to TCE framework, happens through
vertical integration. For example, electronic commerce has opened up a direction that
disintegrates the verticality of a large corporation. Bringing closer the buyers and sellers
has been putatively the transaction-cost-reducing factor; whereas we observe that costs
even while reduced on this count is an accounting cost. Accounting cost reduction is
fictional and this reduction cannot ensure achievement of profit or even of long-term
efficiency.
There, however, is another aspect of TCE and externality. We know following the
formulation (in the Pigovian tradition) on externalities by Coase (1960) that the extent a
property owner can affect others without paying for these effects there arises a social
cost, which is greater than their private costs. Coase argued that owing to imperfections
in property rights this externality that is the divergence between private costs and social
costs appear and the institution of price fails to clear such externalities. This phenom-
enon gives rise to transactions costs. Our empirical observations suggest that Ecom
pulls through economic agents across several segments of industries along the scope
direction or else Ecom pulls through agents who are in the complimentary sectors. Ecom
is therefore a potential source of externality. However, social costs arise because
according to Coase transactions fail to operate through price interfaces. Coase argued
that there were not enough decompositions or partitions between specializations. In
other words, if only enough specializations or separations between economic agents fail
to appear consequent to introduction of Ecom, the social costs will rise. A solution to
the rise in such costs could be dis-intermediation resulting into the formation of M-form
firms. Contrarily separations in economic agencies or in specializations will engender
transactions through price interfaces. Ecom achieves this feat. In Ecom price interface
is regained. Transactions previously entrapped in non-price modes are released through
increased division of specializations, in other words through increased intermediations.
Ecom therefore engenders mediations in the market.
A long period of production refers to the entire input-output table of an economy. A short
period of production refers to a specific transaction chain of a business or a sector.
Electronic commerce increases the length of both these periods. Vertical integration
linked up several such industrial sectors. Ecom and associated expansion along the
direction of scope have crossed boundaries of specific transaction chains or of industry
sectors. Increases in these periods take place because of several other factors as well.
With an increase in the division of labor there would be increases in asymmetric
information, insurance and valuation risks, joint productions of services and other
goods, increased asset specificities, information impactedness and reduction in internal
production. Innovations increase in Ecom because each economic agent has incentives
to speculate and each agent looks for rewards from surprises that it might bring about
in offerings, timings, and linkages. Electronic commerce reminds us about the traders of


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permission of Idea Group Inc. is prohibited.
28 Banerjee


the earlier times when apiece goods were traded based on highly asymmetric information.
Cantillon referred to this and Shackle defined the Neo-Austrian version of profit based
on that understanding of Cantillon. Austrian theory argues that capital is time. This time
is the period of production in an economy. An increase in the period of production is a
reflection on the increase in rate of profit and of capital in an economy. So we could
summarize that Ecom increases speculative profit by furthering the period of production
that results from novel and increased cyber-mediations.
Shackle argued about surprise. He discussed profit and its rate from the perspective of
lengthened periods of production and the increase in division of labor amongst economic
agents who are speculators. Electronic commerce has opened up this opportunity. In
these commerce intermediations in particular, cyber mediations have increased and will
continue to increase. Transactions cost must increase because a principal cannot check
opportunism and lack of trust between agents any longer. We have argued how the TCE
framework fails in explaining the emergent phenomenon of electronic commerce. Neo-
Austrian framework offers a cogent explanation as to how electronic commerce increases
rate of profit and the capital in an economy based on electronic commerce. Moreover, to
counter the looming increase in costs of transactions, Ecom offers furthered mediations
(that is specializations) in price-based transactions. An increase in such price-based
transactions alone can contain social costs and Ecom through increased mediations
offers this as a distinct possibility.




Intermediation and Coordination
Received theory presents intermediation as the structure of a market. Microstructure of
a market (O™Hara, 1997; Goodhart, 1989) refers to dynamics of transactions, relations,
expectations and the time. Intermediaries served the most essential function of the
microstructures of a market. Economic agents who interpolate them in between the
producer of a good or services and its consumer are intermediaries according to the
structural theorist. As a result of this structural emphasis the presence and the relevance
of an intermediary can be analyzed in terms of costs of transactions. A dispersed
microstructure of intermediation can remain operative only so long as transactions costs
(Coase, 1990) do not favor formation of vertically integrated (Williamson, 1985) or
multidivisional firms (Chandler, 1990). This appears to be a static view of the market. This
approach is static because it can indicate substitution of one structure by an alternate
structure alone and it fails to indicate other functions of structures.
We would argue that the microstructure of intermediation serves a major function. This
function is coordination, which elongates the period between production and consump-
tion. Elongation of this period is absolutely necessary to the formation of capital because
capital is nothing but deferment of consumption. Static coordination achieves this
elongation in a limited sense while coordination of dynamic situations enhances this
period substantially. The static structural account on the microstructure of intermedia-
tion fails to capture this key aspect of coordination, which is a central theme in economic
thinking because in its absence competition and innovation fail. Coordination between



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Re-Intermediation and Deferment through E-Commerce 29


agents in a market is the key to the puzzle that the market survives through transforma-
tion, and that agents undergo changes in order to live through. Ecom refers to structural
changes in market mediations and hence in the microstructure. Such changes lest
reduced to anarchy or disruption must adhere to coordination, or more properly to
coordination of expectations. Equilibrium or more particularly a dynamic equilibrium
cannot be attained or maintained without the intervention of coordination. Coordination
without mediation is impossible. We will take up two modes of coordination. Intermedi-
aries are there in order to coordinate between two groups: first between several
producers”current, potential and complementing, and second between producers and
customers”current and potential. The former refers to aspects of competition relating
to interoperability and inter-dependent innovations. The latter refers to aspects of
creating and managing demand in the context of uncertainties. We discuss these two
aspects in the present section very briefly on coordination with customers and in the
following section on coordination amongst producers.
Ecom mediates between price quantity and most importantly the product (innovation)
decisions of the producer, and the utility expectations of the customers. Under the
circumstances of no-innovation, or of one single homogeneous product enjoying
monopoly a la Chamberlin (1933), there is no need for coordination between the producer
and the customer. However, following Richardson™s (1996) argument, a market experi-
ences a sequential competition between succeeding monopolists (contrary to
Chamberlin™s picture of co-existing monopolists) when there are continuous innovations
in product. This sequential competition is between a current product and a future product
(and not as suggested by Chamberlin between two near-identical current products). In
Chamberlin™s analysis a product can be substituted but completely only following the
completion of the life cycle of the product. In sequential competition, as suggested by
Richardson, all of the products get substituted having fulfilled only partially their life
cycles, and as a result firms follow a strategy of offering versions of products. Our
understanding of market making refers to such versions or sequences of products. A
particular product brought out through innovation can be produced necessarily in
shorter quantities. Prices that can be fetched support only normal and not a monopolist™s
profit.
A product version or a sequence necessarily must make a market through arousing
customer expectations on future utility. A sequence of utilities implies therefore that
changes in customer™s perceptions or expectations of utilities take place in harmony with
producers™ perceptions or expectations. In other words, producer and customer must
have mediated relations, which make it possible for the two parties to adhere to a common
frontier of utility ensemble. In static non-sequential competition the role of mediation
remains very restricted. In sequential competition innovations in products would fail in
the absence of mediations. In other words, mediation being based upon sequential
competition must increase in such innovation-led increasing-return-experiencing mar-
kets. Ecom based mediation serves precisely this function of increasing mediation.
Moreover previous markets with near-zero innovations in products could afford to make
calculations on prices and quantities, such as the average cost, marginal cost and
marginal return. In sequential competition no product can complete its life cycle and
hence calculations of quantities and prices remain no longer exogenous. Price-quantity



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30 Banerjee


variables now come under the scanner of negotiated endogenous settlements. Uncer-
tainties about the potential product and information asymmetries between the current
product market and that of the market of the product next in sequence necessarily
implicates microstructures in the market who can bear the risk, who can provide
insurance, or hold the stock-in-progress, and who above all can calculate on durability
of the current product. This switch to sequential competition therefore relegates
monopolistic price-quantity variables to non-importance and substitutes those by new
endogenous and negotiated variables, which are sequentially differentiated prices.
Microstructure of mediation becomes the absolute necessity. Ecom therefore in lieu of
dis-intermediation demands vigorous intermediation through novel market microstruc-
tures.
Finally, a future product and its arrival as well as its power to fulfill the expectations of
the customer must defer the consumption of that potential product. Consumption of the
current product is given up in expectation of the arrival of the future product. Deferment
thus takes place twice at the levels of both consumption and production. Ecom and its
intermediary-based coordination therefore shift the consumption through elongating
the chains of price-based intermediation. This often happens through several kinds of
limit orders or limit pricing, or through other modes of negotiated and insured shifts.
Dispersion of prices can happen only when intermediation advances to raise buffers for
absorbing the shocks. Price dispersion in Ecom can be afforded because enough
mediated buffers have been put in place. This brief account above on customer-producer
coordination shows us how intermediation and deferment increases in Ecom. To recall,
this deferment is of the first kind arising from customer-producer coordination of
expectations. We now look at the deferment of the second kind.




Deferment and Normative Coordination
In this section we elaborate upon coordination that appears necessarily between
producers. The context of production is a sequential competition that is production of
future products through innovations and based upon increasing returns and along
dynamic equilibrium. Successions of short-lived products from several producers must
entangle them in a web of expectations on successions. Another aspect of a product is
that a product in the future must remain interoperable with a set of other products
emergent from complementors lying in the scope direction. Richardson (1997, 1998) did
not elaborate upon inter-operability. There are two possible courses, in the first inter-
operability can be considered as non-sequential that is when inter-operable elements are
pre-reconciled and they reflect a situation of timeless equilibrium. In the second aspect,
it may refer to an input-output system”an interdependent succession of events through
which intermediate products get apportioned to the final consumable products. Input-
output systems allow for technological changes because consequent to technological
changes or changes in tastes, etc., the successions or the relative apportionments might
change. This second mode, even if not immediately and directly as in a Leontieff system,
conceals the element of time and therefore does not depend on pre-reconciliation and on



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Re-Intermediation and Deferment through E-Commerce 31


equilibrium conditions. Richardson seems to have preferred the first mode. We argue
instead that the second mode alone can explain time-based, technological and unfore-
seen changes that remain operative over any inter-operable system.
This second mode is close to the Austrian understanding of time-dependence of capital
and yet it is different in significant manners from it, based as this proposal is on Shackle™s
(1972) argument. In fact, we begin from Shackle™s argument and develop this idea a bit
more. Normative coordination is this additional element that Shackle did not explain.
Normative coordination we wish to argue is an outcome of the “capital as time” thesis
of Shackle. We do so more because strategy apprehends and orients this dimension of
time. Criticality of time in orienting one™s product-lines or technology constitutes a
strategic move, and such a move must be able to influence and orient the moves of other
firms. This capability to be able to orient the orientations of other firms, dependent on
the expectation of expectations, can be achieved by strategic knowledge. Two corollaries
follow. First, we have now a new definition of capability that is the capability to leverage
strategic knowledge about others. Second, a strategic knowledge is about the processes
in other firms and is about the possibilities of their orientations towards their own
strategic advantages. This dimension of orientation is captured by the second mode of
inter-operability. Time enters here because orientations appear in possible cascades. A
particular ex-post orientation tells us about the choices committed and acts executed.
Success in orienting processes of other firms by leveraging strategic knowledge toward
one™s own advantage becomes strategic only when this resultant orientation accrues a
Cantillon profit or only when this ex-post inter-operation appears as “capital as time.”
An orientation through normative coordination of several intermediate products is an act
of deferment of the consumption. A deferment of consumption achieved through
elongation of the period of production or through elongation of the divisions of labor
constitutes capital. It follows then that strategic acts are undertaken to increase capital.
Such strategic acts become possible through normative coordination.
Shackle (1972) argued, “¦ capital is time ¦ capital is the manifestation of the role of time
lapse in the productive process ¦ capital is delay. But delay is an inconvenience, a
disutility, a discomfort, something which will not be borne except for a reward. ¦ capital
seems to ¦ offer a prize for the endurance of delay ¦ (as) a marginal balance.” A pure
Austrian approach assumes that deferments are pre-reconciled amongst parties. Pre-
reconciliation takes place through coordination or inter-operability of the first mode, as
described above. However, there are opportunism and cheating, there are technological
changes never foreseen, and there are changes in utilities. Such changes moreover
happen along temporal successions. Richardson (1960) does not recognize such changes.
In contrast, Richardson™s schema fits in with the Austrian schema of plan-coordination.
Departures that Richardson, and following him Leijonhufvud (1993) and Krafft and Ravix
(2000), made consisted in recognizing that pre-reconciled plans would still take time”
a duration that information needs to flow across firms and a time called “gestation lags”
that would remain invariable across investment commitments of firms. The problem of
aligning pre-reconciliation with plans (which in equilibrium surely would be equivalent
to strategy) is then a problem of quickening of computation (this alignment is
computationally feasible). Krafft and Ravix (2000) find out the computational algorithm
with two forms, namely “maintain competitive investments under a maximum threshold
level” and “maintain complementary investments over a minimum threshold level”” and


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32 Banerjee


they argue that “viability of the industrial system is ensured only if the two conditions
are proved simultaneously.” This leads them to argue that firms must act for coordination
of both competitive and complementary investments.
Time lag in this model does not take into consideration delays or deferments owing to
possibilities. A possibility to link up with or be complemented by a set of alternatives at
any point of time is afforded by a technological innovation. This is the first objection.
The second objection is that deferment is capital and it happens not because of a “market
failure.” In the Richardson-type of argument delay is undesirable. Krafft and Ravix argue
for institutions that could alleviate problems of delay. These institutions can take up
several forms, such as sequential contract from the property rights approaches of Hart
(1988), Grossman and Hart (1990), et al., where there is information delay say due to
uncertainty but there is no investment delay; or, if there is irreversible investment while
there is no information delay a firm needs to make right decisions regarding profitability
of a competitive investment (Dixit & Nalebuff, 1991). Other forms of coordination that
might be taken up include informal market relation, licensing, strategic alliances, and
formal agreements of various sorts, vertical integration or simply integration. The nature
of the institution, it is argued (Langlois and Robertson, 1995; Teece, 1980, 1986, 1988)
would depend on the type and length of delay. Teece (1986) argues that if the delay is
caused by an autonomous innovation (which is relatively independent of other stages
of production) then several types of institutions might emerge depending on the internal
capabilities of the relevant firms. In case the innovation is systemic (in which simulta-
neous changes in several stages of production is required) Langlois and Robertson
(1995) argue that there is the likelihood of vertical integration. Similarly when there are
delays in both types and the delays are long, vertical integration resolves the simulta-
neously present coordination problems, because the incumbent will have to generate
information on strategies that other firms can implement as well as the incumbent will have
to muster coordination of the entire chain of systemic innovation. In case the innovation
is autonomous and the delays necessarily shorter a large number of cooperation tools
would suffice. And when there is only one type of delay in market-based transactions
or when both the delays are of near zero duration simple market-based relations would
be able to resolve the coordination problem. Institutional arrangements of the type of
vertical integration according to this argument appear necessary only under specific
circumstances.
According to this thinking, longer delay caused by systemic innovation can be managed
as per a pre-reconciled plan. There is little uncertainty involved. Autonomous innova-
tions according to this argument would experience shorter delay. Both these appear to
us as unsustainable. Systemic innovations we understand as ex-post. Systemic innova-
tions appear through an uncertain mechanism called by Shackle as “orientation.” The
delays and their lengths are attributable to this orientation. Delay as deferment refers to
the postponement of the consumption with the expectation that there would be a profit
at the margin. The longer the delay or the “average period of production,” the higher is
the capital. “It is this orientation of the presently co-existing objects which solely
contains what we are measuring when we examine the ˜period of production™. Orientation
is thought, design, intention, and expectation. Thought is mutable and elusive, thoughts
in different minds about ˜the same™ objects need have little in common” (Shackle, 1972).
An ex-post systemic technology offers solution to the plans “now” made but there is little



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Re-Intermediation and Deferment through E-Commerce 33


to ensure that such plans would indeed be executed. The binding to a plan is ordinarily
verified through committed or irreversible investments. The average period of produc-
tion is computed from such plans “accepted for the time being as a basis of immediate
action, but by no means guaranteed” (Shackle, 1972). Technology dictates the current
configurations that would give the plans stability in some “short period.” Invariably
advances in technology would tend to shorten this period “but the pace of innovation
would itself be limited by economic considerations, by commercial organization and
habits and by contracts” (Shackle, 1972). We might understand an average period as per
the plans made by all participants to be the production net in an epoch, and the short
period as per the plans made by participants to a systemic technology (as in a chain of
Ecom usage) while a period even shorter as per plans made by those few who participate
in an autonomous technological innovation, involving as it were a few firms through
Ecom. However, we must emphasize that lengths of periods are determined more by
economic states of affairs than by technological innovations. Increase in the average
period, for example, Shackle argues, is never realized to the full because the production
net is too lengthy and circuitous and negotiation with the net too protracted owing to
the presence of durable equipment or the inertia caused by irreversible investment.
Epochal increase in the average delay reflects the general rise in capital and in divisions
of labor. Systemic increase in delay reflects an increase in divisions of labor. The velocity
with which an intermediate product might move through Ecom intermediaries reflects
technological pace and the productivity but that hastened velocity cannot compensate
for the lengthened divisions of labor. Prior to its appearance, technology is uncertain.
However, following its appearance, it determines the circuit of production and hence the
plans for production. Human ingenuity reflected in the strategic moves, however,
bypasses such determinations by inventing and innovating further on economic orga-
nization of production. This is a step that a firm takes with the hope of reaping a profit,
which is beyond technological rent (the Schumpeterian profit) and which belongs to the
Cantillon profit. The firm resorts to strategic surprise and evocation of expectation.
Modes through which expectations can be raised include of course lengthening of the
production net, bringing about novelties and surprises in combining resources or in
design of contracts and finally in innovating upon new technologies and in engendering
divisions of labor. To underscore, Ecom affords best such requirements of mediation.
Coordination under such circumstances must look forward to the future. The coordina-
tion discussed above referred to the plans made previously. Concurrent coordination
refers to the adjustment process. However, plans for deferment of consumption and on
surprisingly new forms of intermediate products and combinations thereof are unique to
a firm. This plan refers to the present and the future. Incumbent firms expect that novel
routes of production net will emerge from its strategic choices. Firms belonging to the
strategic milieu expect that expectations of the incumbent follow a path that is advanta-
geous to them. Coordination of expectations can be achieved through intermediations,
acting as a surrogate for dialogues amongst the parties. A dialogue often continues for
rather long, however, often taking off to a rounding up through the evolution of norms.
A norm is not a rule. It is not a routine either. A norm is always robust when it speaks
only of what parties are not expected to do and when it allows freedom to parties to write
whatever their expectation guides them to. A norm sets down injunctions then. Injunc-




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34 Banerjee


tions allow a very large space to the parties in a dialogue to expect the expectations of
others.
Strategic expectations of economic agents, several producers complementors and
intermediaries experience deterrence caused by durability of investment. Durability
reduces uncertainty, shows commitment and exacts reciprocal durability of investment
from other parties. Ex-post plan and existing technological paths are durable too. Novelty
in technology or innovation and reduced durability of investment allow economic agents
to engender differentiation of labor and increase in lengths and numbers of nested
circuits of a production net. An agent defers the consumption with the expectation of
profit. Profit would be allowed to this agent only if there are other agents who participate
in the deferment and each of whom holds expectations on profits. The deferment must
complete itself at a future time on approaching the average period of production. Similar
to the normative dialogue these expectations need to follow norms in order to bring about
completion of a particular production net. Norm guides the expectations of agents by
disallowing them certain paths and the agents with the freedom to expect expectations
of others keep generating short-period nests and an average period dialogue by
remaining within the norm. Short periods remain nested within the overall structure of
the average period.
To put in another way, it follows from our analogy that divisions of labor do not possess
uniqueness or some unique rationale. Divisions of labor across firms or across several
groups, such as the intermediaries, would then, we argue, be contingent to a situation
of expectations. Such divisions retain fluidity. Designing an end consumable product
through severalties of coordination might take several paths with several alternative and
possible divisions amongst the participants who all join in the deferment-based expec-
tations of expectation. The only binding that these groups or firms would consider
necessary is what we have called normative binding. A great deal of ambiguity can be
allowed in such engagements. Participants who could only guess based on partial and
always evanescent evidences offered by the partners, use as it were a mix of axiomatic
and subjective probabilities, or better still would be to think about potential. This
potential gelled in time is the capital.
The argument of Krafft and Ravix or Leijonhufvud regarding the failure of the market to
offer solutions to a coordination problem when there are two types of delays, namely that
on information delay and investment gestation lags, has led to organizational and inter-
organizational solutions. They include Teece or Langlois and Robertson, who have
found vertical integration of several firms as solutions to longer delays or varieties of
contracts as solutions to shorter delays. We observed that delays when caused by
strategic intentions or by changes in market tastes or through increased divisions of
labor, all of which appear consequent to Ecom, bring about uncertainties of expectations
about future. The received argument refers to the alignment between plans made in the
past and the current states of affairs. The proposed alignment in received theories offers
technological solutions (that tend to reduce delays) that raise efficiency and organiza-
tional solutions in the form of dis-intermediation. However, institutional solutions are
different from such organizational solutions. Coordination in Ecom is an institutional
problem and therefore it requires an institutional solution. Normative coordination is an
institutional solution. Normative coordination limits the failures in coordination. An



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Re-Intermediation and Deferment through E-Commerce 35


institution might not offer a particular organizational solution as the preferred mode.
Several organizational or quasi-organizational, including contractual, solutions might be
considered as specific solutions. Vertical solution, we would argue, need not be
considered as the only preferred solution to coordination with long deferment. Vertical
solution can be considered only when information being exchanged across firms refers
to a pre-reconciled plan. Information that cannot unambiguously describe a situation or
that can remain incomplete evidence and is required to adjust to envelopes of expecta-
tions on the future cannot even while exchanged help formation of vertical integration.
Ecom offers such intricacies and hence eludes organizational solution such as achieved
through dis-intermediation. Moreover, deferment in the received theories is undesirable
and technological solutions that raise efficiency have been proposed for reduction of its
length. We argue technology fails to reduce the duration of average period of production.
Contrarily technology increases this period of deferment, which represents capital.
Technologies from firms who are not vertically integrated and who make non-durable
investments need not reduce the deferment period, and in circumstances might even
hasten deferment.




Conclusions
At the end of the day following the introduction of Ecom there could be fewer
intermediaries in a vertical value chain. However, vertical value chains have lost their
attractiveness in a time of increasing returns based on scope-wise innovations in
product. Products in this setting of Ecom offer sequential competition. Firms and their
customers coordinate their expectations based on the next versions of products.
Similarly, firms that are competing in sequence or at the same time must coordinate their
expectations on each other because products from their stables must fulfill obligations
of interoperability, as well as satisfy mutually agreed upon restrictions on quantity and
prices. Coordination amongst producers too affords a cascaded deferment of both
consumption and completion of a systemic product. These two types of coordination
involve incompleteness of contracts, uncertainties and liquidity of investment. The
length between production and consumption thus must create enough number of
economic agents who can trade in risks, insurances, information and liquidity. The
intermediaries, who in this Ecom environment are the cybermediaries, offer this service
as the microstructure of market. Cybermediaries therefore emerge to fulfill this novel task.
The economic-value-adding activities by these cybermediaries lengthen the circuit of
production that terminates in consumption. A lengthened circuit indicates deferred
consumption and a consequent rise in capital and in profit. Ecom therefore requires
possibly more quantity of intermediation and surely novel modes of mediation. Neces-
sarily little of this novel mediation takes place along the previous value chain. Most of
the novel cybermediations appear in the scope direction and away from the vertical
industrial segment. The economy under Ecom increases in the scope but not through
Chandlerian large multidivisional firms. The economy increases through highly differen-
tiated and variegated cybermediaries who lengthen the circuit of capital and as a
consequence of increasing the riskiness of a business increase the profit. This profit does


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permission of Idea Group Inc. is prohibited.
36 Banerjee


not arise in technological innovations particularly of the kind that increase efficiency.
Contrarily this profit is strategic because the cybermediaries arrange and then rearrange
the configurations of a market and thus through bringing about surprise the cybermediaries
reap enhanced profit.




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