[RRE]Community Level Socio-Economic Impacts of Electronic Commerce

[<eugene.leitl@xxx.xxxxxxxxxxxx.xxx]

From: Phil Agre <pagre@2Ilb2y5ugeyv5yvoJ1aa0xMaeGnry8Zh0pAWOq6jI6O-ZwQ_rwHASwOtYgks7NQoNbK68dKG4i2uwIKaLmMk.yahoo.invalid>

[You should send this great paper to any small business or community
economic development people you happen to know, but its significance
also runs deeper.  It's a study in the wrong-headededness of Internet
hype, and in the degree to which the culture has swallowed ideas about
the Internet that make no sense at all.  In particular, the Internet
is commonly associated with globalness, and with primitive fantasies
of transcendence and escape and omnipotence -- fantasies that are
misleading at best for most normal people.  Yes, electronic commerce
probably means that many local businesses are toast, although the
ignominy of your life's work being wrecked by a competitor who loses
extraordinary amounts of money on every sale must be considerable.
But it's also true that many businesses, if not most, are inherently
local.  The question is where to draw the dividing line around the
Internet's "impact".  The Internet is all about boundaries, and the
boundaries around businesses, among businesses, and between businesses
and their customers are all being renegotiated.  The bits that can be
made global will be, and the other bits can be restructured to amplify
local knowledge and connection and embeddedness.  In short, although
the hype may be right about the magnitude of the changes, it is wrong
about their nature.  Unfortunately, in the short run natural selection
tends to favor easily-propagated ideas over empirically-grounded ones.
Serious ideas like the ones in this paper take longer.  Hopefully in
the long run the damage from the hype can be reversed.  I've forwarded
the paper by permission and extensively reformatted it.  Any glitches
are my fault.]

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Date: Fri, 1 Oct 1999 13:01:58 +0200 
From: "Steinfield, Charles" <c.w.steinfield@FBpQhPJZ-f8SKdZ4IosHVkp73kkjwOgEefUQH-EO20wrrMUl6sReTN24pzeDucB0usvjmAfnmIGbFJCWWHAhsS9z6g.yahoo.invalid>

[...]

Community Level Socio-Economic Impacts of Electronic Commerce

Charles Steinfield
Visiting Professor
Faculty of Technology, Policy and Management
Delft University of Technology
Email: c.w.steinfield@Za1ZZuN0kQbkasNzethZeEOpXa6b5tBbgBWecEVavgWMYNMtrGQwW-gQhnHPQBX3LE1U9idP8fVaw3_aaOdhTOZZwYxUXwwmwQ.yahoo.invalid

Pamela Whitten
Department of Telecommunication
Michigan State University
Email: pwhitten@HhyyJcR7ldmfVmbl3VsdKgSZEZ34qKMo75bZK2qn8lqwb9oB8XrXHaQYZsElRvqcLVbNJ7ZoHyw8P9g.yahoo.invalid

Introduction

In the great excitement generated by the Internet's potential to
globalize commerce, researchers have virtually ignored how electronic
commerce will impact local businesses and their communities.  A
primary emphasis in most discussions of electronic commerce is the
global nature of electronic markets, and the lower costs of reaching
consumers throughout the world (e.g., Amazon.com, a firm that did not
even exist a couple of years ago, now sells books in more than 150
countries).  Through electronic commerce, companies are now within
reach of anyone with Internet access, enabling them to compete with
traditional businesses in any given community without having to make
the investments in "bricks and mortar" and without an expensive
private global telecommunications network.  The Web theoretically
lowers transaction costs that formerly served as a barrier to entry in
local markets, enabling consumers to become aware of and transact with
electronic retailers located anywhere.

The rhetoric suggesting that electronic commerce fosters global
markets is convincing, and exerts a powerful influence on the
business strategies of companies going online (Steinfield & Klein,
1999).  Indeed, an article in the Economist proclaimed, "The Internet
is affecting all businesses in similar ways.  Every industry, for
example, has suddenly become part of a global network where all
companies are equally easy to reach.  As a result of these changes,
many businesses that survived mainly because they were conveniently
placed, or because they provided information that was hard to find,
will soon have to find some other raison d'etre" (The Economist,
1997).

As electronic commerce grows, an important socio-economic side effect
will be increased competition with the traditional businesses in
any given local community (Steinfield, Mahler & Bauer, 1999a; 1999b).
A recent report by Jupiter Communications, an Internet research firm,
estimated that 94 percent of online purchases made in 1999 would
otherwise have been made in traditional retail channels (reported
in CNN Interactive, August 6, 1999).  Of course, local businesses
may also gain from the efficiencies afforded by electronic commerce,
both in better serving their local constituencies and by reaching out
to distant markets.  Some anecdotal evidence suggests that in some
instances this is occurring, especially as traditional retailers learn
to better integrate their Web and physical outlets (New York Times,
August 16, 1999; Steinfield & Klein, 1999).  However, at least one
study suggests that local merchants are, in general, ill-prepared
to take full advantage of electronic commerce, and thus are unlikely
to see any gains from it (Steinfield, Mahler & Bauer, 1999).  Other
anecdotal evidence points to the plight of local merchants who attempt
to go online with limited resources, with examples of local stores who
sell little to nothing through their online ventures (New York Times,
July 26, 1999).  These initial indications suggest the need for new
research on local impacts of e-commerce.

In this paper, we suggest that it is important to consider now
how electronic commerce may influence the health of local economies.
Despite the rhetoric that electronic commerce is free from the
constraints of geography, we argue that there are good reasons
to reconsider the role of physical location in making e-commerce
policies.  Following Steinfield et al., (1999a; 1999b), we outline the
theoretical rationale for expectations regarding how local businesses
use and are impacted by electronic commerce.  A small exploratory
study of local business use of the Web in one community illustrates
the general tendency to focus on distant, rather than local markets.
We then show that transaction cost and competitive advantage
approaches, supplemented by perspectives from research on social
networks and trust, enable the development of locally sensitive Web
strategies for businesses in a given community.  We highlight generic
strategies that local businesses can use to leverage their physical
presence in a market with electronic commerce in order to better
compete with distant Web-based companies.  The paper closes with a
discussion of the policy implications from a community perspective and
an outline of research issues.

E-Commerce and Local Businesses

Transaction-costs economics, emphasizing the cost-savings afforded
by network-based communication, is generally used to explain the
rise of global electronic markets (Benjamin & Wigand, 1995; Malone,
Yates & Benjamin, 1987; Miller, Clemons & Row, 1993; Wildman & Guerin-
Calvert, 1990).  Networks reduce the constraints imposed by distance
by permitting the rapid exchange of information between distant
buyers and sellers and can more effectively link buyers with sellers
while avoiding costly search efforts (Malone et al., 1987; Wildman
& Guerin-Calvert, 1990).  Not only does electronic commerce support
the provision of goods and services at a lower cost, but it can
potentially enable greater customization to the needs of individual
buyers (Choi et al., 1996; Kalakota & Whinston, 1996).  As the
argument typically goes, distance becomes irrelevant for goods
and services that can be produced anywhere and either delivered
electronically or physically by courier to buyers.  Earlier analyses
by Malone et al., (1987) spelled out the network effects, particularly
in the area of buyer search, where electronic brokerage capabilities
of networks enable buyers to search for and locate products that match
desired features and prices.  The relatively low cost of creating
a Web presence, which is then accessible to those connected to the
Internet worldwide, enables firms to use their electronic site as a
surrogate to establishing a physical presence in a local market.

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. (1)

* Ability to set up facilities near important factors of production,
which would not be available to an "offline" physical business in a
given community.

* Lower costs due to the ability to bypass many of the intermediaries
in the retail distribution value chain (Wigand & Benjamin, 1995;
Wigand, 1997). (2)

* A higher degree of transaction automation, leading to improved
service and lower labor costs.

* Ability to rapidly respond to changes in the market, through price
adjustments which can be almost in real time (Bailey, 1998), and well
as changes in product mix and marketing approach.

* Ability to easily capture and use market relevant data generated
during routine interactions with customers (Steinfield et al.,
1993).  Many smaller local businesses are unlikely to have equivalent
capabilities.

* Ability to add value to products and services by offering links to
complementary producers (Steinfield et al., 1993).

* Ability to offer 7 day by 24 hour access with little additional
cost.

* No limitation on the depth of information provided to customers,
which can aid in product selection and potentially reduce return rates
(New York Times, August 23, 1999).

These economies can potentially enable Web-based retailers to easily
undercut the prices of local retailers who formerly faced little
or no competition.  Despite some empirical evidence to the contrary
(Bailey & Brynjolfsson, 1997; Palmer, 1997) (3), there is a general
expectation that prices will be lower on the Web.

Using transaction cost theory, we 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 (4).  Of course, local
merchants might respond by establishing their own Web presence,
making up any business lost to Web-based competitors by expanding
into new geographic markets themselves.  However, there are good
reasons to be skeptical about the likely success of this strategy for
many smaller local retailers (Steinfield et al., 1999).  Web startup
firms face significant barriers in their attempts to attract customers.
The sheer number of new Web businesses reduces the likelihood that
people will chance upon a Web store, necessitating large marketing
and advertising expenditures to get noticed.  Smaller local retailers
also may not have the business systems in place to adequately
serve distant customers, even if they do attract them.  The ability
to process electronic orders, verify payments, ship to distant
customers, properly apply sales tax regimes, handle returns, and many
other skills need to be acquired.  Moreover, despite the increasing
sales activity on the Web, lack of trust remains a strong inhibitor.
Unknown virtual Web stores are more likely to experience problems
due to lack of trust than established brand names, favoring the larger,
nationally-known company.  In fact, at least one survey of Web users
has shown that lack of a local physical presence inhibits purchases
(GVU Center, 1997)(5).  Other surveys suggest that problems with
unreliable products and difficulties returning goods have dissuaded
Internet shoppers from being repeat buyers (Coates, 1998).  Recently,
one Internet market research firm reported that nearly two thirds
of all online customers still do not trust Web sites with private
information, despite the use of prominently featured privacy policies
(Jupiter Communications, 1999).  And, probably most importantly,
smaller local firms are unlikely to have the resources or skills to
create the kinds of sophisticated, highly interactive Web sites that
now populate the Web (New York Times, July 26, 1999).

Electronic commerce is also likely to influence the buying patterns
of businesses and consumers in a local community.  Transaction
cost economies can also be used to explain the attractiveness of
Web commerce for buyers (including firms and individual consumers.)
Electronic commerce has implications for all stages in an economic
exchange, including search and evaluation in the pre-purchase phase,
ordering and delivery in the purchase phase, and after-sales service
in the post-purchase phase (Choi et al., 1996; Kalakota & Whinston,
1996).  Gains accrue also to buyers, who can reduce their transaction
in each of these stages of the purchasing process.  As buyers seek
out lower cost and higher quality producers on the Web, the less
sophisticated local providers not only fail in their efforts to
increase sales from distant customers, they also suffer losses in
their own market as well.

This effect also can occur in business-to-business transactions.  The
burgeoning literature on IT and virtual organizations, combined with
transaction cost economics, suggests that the Web will encourage firms
to purchase goods and services from remote sources to find the best
producers regardless of location (Davidow & Malone, 1992; Wigand et
al., 1997).

This suggests that many local businesses might not fare well in
direct competition with new Web competitors, particularly for easily
transported products.  As we argue in a subsequent section of this
paper, however, businesses with a physical presence do have their own
advantages when the target market is in their specific geographically
defined community.  And, when this physical presence is combined
with creative uses of the Web targeted to their local constituency,
the resulting synergies can offer even greater competitive advantage
(Steinfield et al., 1999a; 1999b).

The rub is, however, that despite any potential relative advantage
to focusing on the local market, the evidence suggests that local
businesses are more likely to direct their Web commerce at distant
markets (Steinfield et al., 1999a) rather than their own local
community.  Studies seem to indicate that the majority of local
businesses are drawn to the almost infinite audience now on the
Internet, and focus on the Web as a tool to grow sales rather than
provide better services to their home market.  Auger & Gallaugher
(1997), for example, compared the motivations to establish an online
presence among small and large Web-based businesses.  They found that
smaller and medium-sized firms go online to increase sales outside
their geographic region, rather than to improve business in their
local market.  Steinfield et al., (1999a) found little evidence
of a locally-oriented Web strategy among 250 businesses that had
established Web sites in one medium-sized Midwestern city.  And, as
we show below in a follow-up study of almost 100 businesses in the
same community a year later, there remains relatively limited local
focus on the Web sites of those that had developed an online presence.

An Exploratory Study

In an attempt to understand if and how businesses located in
a specific local area are using the Internet to support and/or
supplement their local company, we conducted a study of local
businesses in Lansing, Michigan.  We applied two data-collection
strategies to gather this preliminary data.  In the first step, we
randomly selected businesses from the Lansing area business white
pages and called them to determine which ones had a Web site.  Our
goal was to randomly identify 25 local businesses with a Web site for
further analysis.  We had to call 94 local businesses before reaching
our goal of identifying 25 businesses with Web sites.  All 94
businesses were asked basic demographic questions, but those with Web
sites were asked additional open-ended questions to ascertain their
Web-related uses and goals.  For the second phase of data collection,
we visited each of the Web sites and conducted a content analysis
based on 12 pre-defined variables which identify strategies on the
Web targeted for local customers.  Of the 25 businesses that reported
having a Web site, only 20 were actually accessible during the
data-collection phase of this study.

The results of this exploratory study appear to support our hypothesis
that few businesses were actually applying strategies on their Web
site to take advantage of their local presence.  For those companies
with a Web site, the majority report the provision of information as
a function of their site with 37% providing company information and
19% providing product information.  In addition, 17% reported that
customers can communicate directly with the company via the Web site
and 9% reported that a transaction can be conducted via their Web
site.  When asked whether their Web site targets people specifically
in Lansing or elsewhere, 28% reported Lansing, 48% reported elsewhere
and 16% reported both.  Just over one third of the respondents feel
that they have competition from other company's Web sites that offer
similar services.  Thirty-six percent of the respondents reported
that they are doing some form of business-to-business transaction
via the Web such as purchasing products or services needed by their
company.  One-quarter of the businesses report that they have tracked
a difference in their customer base since putting a site online
with most reporting new international clients.  Sixty percent of
the respondents have plans to increase their use of the Internet to
deliver products and services over the next few years.  Almost all
the businesses felt the Internet can help them be more competitive
by enhancing their visibility and client access to their products
and services.  However, our data did not tell us whether this
enhanced visibility and access would be on a local or global level.
Interestingly almost 50% feel that it is important to have a physical
office (or a local office) in a community to compliment a Web
site because of the need for personalized service and relationships
and those products/services which cannot be delivered via the
Internet.  Finally, 60% of the businesses report membership in local
organizations with the Chamber of Commerce being the most common
membership.

The results from the first phase of data collection point to some
interesting indications.  First, these businesses are not currently
using their Web sites to deliver sophisticated services and less
than half are taking advantage of the Internet for products and
services they need to run their business.  Even though many plan
to ramp up their use of their Web site, they didn't provide many
concrete examples of exactly how they would use this tool to become
more competitive.  And, more than half recognize the need for local
involvement evidenced through their membership in local organizations.
However, phase two of our data collection did not find evidence that
these businesses are using their Web sites strategically to bolster
business from their local community.  Three-quarters of the sites
listed a local address and 80% provided a local phone number, however,
only 35% provided a map or directions and only 15% included a photo
of their local facility.  A mere 10% advertised in-store specials
and only 5% used coupons or some marketing strategy such as listing
goods/services available only at the business to bring clients into
the physical store.  The bottom line is that these businesses do not
appear to be employing strategies that capitalize on their physical
presence in the local community.  Furthermore, for those businesses
without a Web presence, only 30% reported plans to create a Web site
for their business.

In summary, in this section we have identified two inter-related
forces stemming from the growth of electronic commerce that
collectively threaten the health of local communities.  First, new
competitors who offer goods and services to a local market via the
Web are likely to siphon away business that formerly went to local
physical providers.  Conversely, the ready access to new suppliers
of goods and services who were formally unknown, unavailable or
too costly to reach, will shift the purchasing habits of both local
businesses and consumers.  Second, local providers attracted by the
allure of the seemingly unlimited size of the Internet market, are
more likely to de-emphasize their geographic location and physical
establishment when they do go on the Web.  Except in special cases,
such as when local providers are offering truly niche products
unavailable elsewhere, or have already developed a successful offline
business catering to distant customers (Steinfield et al., 1999a),
targeting distant markets is not likely to be successful for the
majority of local businesses.  And, local communities are likely to
be impacted as their local businesses look to service clients outside
their geographic area.  Our next section outlines some of resulting
community level impacts.

Community Level Impacts of Electronic Commerce

Our analysis up to now has focused on the individual firm level
of analysis.  From an economic point of view, it can be argued that
we should not be concerned if electronic commerce helps to weed
out inefficient local producers.  In this line of thinking, local
consumers will be better off if they obtain the goods and services
they need from more efficient providers.  Social welfare is thereby
enhanced, and therefore no action is required.  The fallacy with
this view is that while indeed there will be individual cases of
local buyers gaining more value and greater access to suppliers, the
results at the aggregate community level may be undesirable for local
residents.

A community level focus would uncover, for example, some of the
following social costs of electronic commerce:

* Job losses, particularly in relatively unskilled areas already
quickly disappearing in the digital economy.  Sales clerks,
stockpersons, and other entry level jobs offering employment options
for teenagers and other unskilled workers are likely to be the hardest
hit.

* Loss of local shopping options that, even with higher prices,
afforded some conveniences.  Consumers may have more choice on the
Web, but they also end up losing some necessary flexibility.  Examples
include situations where a product is needed immediately, and cannot
wait even for next day delivery and more costly product returns.

* Decreased attractiveness of local community due to the loss of
boutiques or other businesses that enhanced the quality of community
appearance and life.

* Loss of locally produced goods and services that may have been
tailored to particular needs and tastes of the local community.

* Reduced tax income from business, resulting in a reduction in the
ability to fund government services that enhance community life.

Clearly not all communities will be affected equally, and 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
competitiveness of local firms once they are exposed to Web
competition, can be a factor.  As we note in our concluding section,
there is a need for community level research to tease apart the many
possible social and economic impacts of electronic commerce.

Towards a Local E-Commerce Strategy

We believe that there are good reasons for businesses with a physical
presence in a community to develop a competitive strategy that
leverages their physical store when competing on the Web.  Rather
than using the Web only to attract distant clients, an alternative
strategy for local merchants is to use it to better defend their home
territory, and offer better service to the local community (Steinfield
et al., 1999a; 1999b).  In this section, we review the basic arguments
for expecting local businesses to enjoy a competitive advantage over
their Web-only rivals when using a hybrid Web plus physical presence
strategy.  Following Steinfield et al., (1999b), these can be broadly
grouped into four categories: 1) trust and embeddedness , 2) consumer
needs and behavior, 3) services and applications that capitalize on
complementarities between the Web and their physical presence, and 4)
local knowledge.

Trust and Embeddedness

A commonly cited impediment to online shopping is consumers' lack of
trust in the legitimacy of the Web-based store (Bollier, 1995; Coates,
1998).  Indeed, the emerging digital certificate infrastructure
appears to be motivated by a desire to demonstrate to potential
consumers that merchants are not merely criminals masquerading as
a business in order to obtain credit card numbers.  Consumers who
recognize the Web store as an extension of an existing business may
perceive it to be more legitimate, and have more trust in the store.
This is not only likely to be a local phenomenon, but certainly
influences perceptions of national brands as well.  Nonetheless,
we expect that consumers in any particular local market will have
more confidence in a Web business if they can associate it with a
particular physical store that they have visited or seen in their
community.  It also may be the case that distant consumers will
perceive a Web business to be more legitimate if they are made aware
that it has been a successful physical business.

Embeddedness is a term that has been used by sociologists when
describing the extent to which economic exchanges are predicated upon
patterns of social relations in any community (Granovetter, 1985).
According to Granovetter, embeddedness is often considered a problem
by economists, who argue that when economic exchange is determined by
social relations, inefficient allocation of resources can result (6).
However, he also notes that social relations often facilitate trust,
permitting exchanges without expensive contracts or legal fees and
thereby reducing costs.  Recent empirical work by Kraut et al., (1998)
found that a strong predictor of the use of a particular supplier
for acquiring key inputs was the importance of personal relationships
between producer and supplier.  They further found that electronic
exchanges between buyers and sellers are not only associated with
interpersonal linkages, but the quality of electronic exchanges
complemented by interpersonal relationships is higher than
electronic-only exchanges.  Businesses in a community are likely to
be embedded in a number of local social and business groups that can
serve as the basis for forming such personal relationships.

Embeddedness that enhances trust can occur in more than familial
relations.  Local merchants may belong to chambers of commerce,
volunteer organizations, churches, and other types of community
groups.  Through these efforts, they become recognized and trusted
members of the community.  These associations may extend to the Web,
for example when other local businesses provide reciprocal linkages or
endorsements.

Consumer Needs and Behavior

Consumers have a variety of needs and preferences that influence their
shopping behaviors.  Here we mention only a few possible consumer
needs and shopping preferences that may offer a competitive advantage
to a local merchant who also establishes a locally-oriented Web
presence.  Our goal is to illustrate those cases where the combination
of Web plus physical presence would have a greater chance of capturing
business than a Web-only presence.

With a locally available physical store, consumers' perceived risks in
engaging in online shopping are potentially reduced.  As noted above,
problems associated with the return of faulty merchandise are a major
reason for lack of repeat online purchases (Coates, 1998).  A local
physical presence reduces such risks by providing a low cost means
for returning flawed goods, or seeking technical assistance with a
particular product.  People may also learn about products at the Web
site, but confirm product quality by visiting the store to physically
inspect the goods prior to purchase.  Such pre-purchase and
after-sales services not only reduce risk, and thereby lower consumer
transaction costs, they can further build trust in the Web store.

Shoppers are not homogeneous, and may have different preferences that
influence their use of both regular and Web-based stores.  Various
market segmentation approaches, such as SRI's Values and Lifestyles
(VALs) and Internet VALs (iVALs) are examples of marketers' attempts
to understand diverse consumer preferences that affect purchasing
behaviors (7).  It has been suggested, for example that the Web excels
in 'search' goods, for which there are particular product features
that enable evaluation by consumers prior to use.  The Web facilitates
search allowing consumers to more easily locate desired products
(Klein, 1998).  Klein (1998) argues that the Web even turns
'experience' goods, which are thought of as products that can only
be evaluated after trying them, into search goods, by using multimedia
capabilities of the Web to permit online experience (8).  Coupled with
a purchasing style characterized by extensive research prior to actual
purchase, the Web can be a powerful complement saving consumers on the
high search costs associated with such information gathering.  Others
suggest that many consumers prefer the social and personal experience
of shopping, engaging in interaction with others in the marketplace as
they shop (Sarkar et al., 1995).  With both a Web and physical store,
such diverse preferences can be addressed.  There are likely to be
shoppers who exhibit hybrid patterns, such as preference for gathering
information online, but making actual purchases in a store.  Some
may prefer the convenience afforded by the Web, and use it to locate
desired products, but due to the lack of trust in the security of
the Web, prefer to make actual transactions in person.  Perhaps
most important are the consumers who desire immediate gratification,
and do not want to wait for products to be shipped.  They may
identify products online, but cater to their desires for immediate
gratification by picking up the product at the local store.  These
are all examples where the physical store would capture purchases that
otherwise would not have been made with only a Web-based store.

Complementarities Between Web and Physical Presence

The Web store and the physical store can support each other in many
different ways, capitalizing on natural complementarities (Steinfield
et al., 1999).  These include cross promotions, joint-service
provisions, and value-added services.  Cross promotions are perhaps
the most straightforward example of a natural complementarity.  Web
stores may provide the bargains that people may expect when shopping
on the Internet, but also offer coupons for in-store purchases.
Marketers are accustomed to the use of 'loss-leaders' as an approach
to increasing store traffic, and realize that once in the store,
other purchases for non-discounted merchandise are more likely.  A
physical store can use its Web site to highlight local events, such
as a reading or performance at the store, helping to bring in traffic.
The Web store may also provide information about additional services
that are available at the store that add value to products purchased
online.  A company might use electronic mail for direct marketing,
not only to advertise the Web site, but also to provide information
about in-store products and services.  Some services might be provided
jointly, leveraging the investment in physical and Web presence.  A
good example would be when a computer store offers a product online,
but provides installation and repair services at their premises for
customers purchasing from their Web site.  Finally, the Web store
may function as a source of value-added services for customers who
have purchased or plan to purchase goods at the physical store.  A
purchaser of a musical instrument, for example, may find additional
sheet music at the store's Web site.  Also, Heikillä, Kallio,
Saarinen & Tuunainen (1998) describe the emergence of Web-based
grocery sites, where customers gain convenience by shopping online.
A local grocery store then delivers the chosen items.  Finally,
a number of stores have initiated in-store Web kiosks as a means
of lowering costs and improving service (New York Times, August
16, 1999.)  In-store shoppers gained the ability to search for
products not on display, gather in-depth information without taking
up the salesperson's time, and even purchase or pay for products
for immediate or subsequent delivery.  These various complementary
approaches represent a sampling of strategies a retailer might use to
leverage their investment in physical and Web distribution channels.
In many cases, the natural complementarities offer a distinct
advantage over Web-only stores that might require shipping a product
back for additional service or installation work.

Local Knowledge

Local merchants who target a local market should be able to capitalize
on their local knowledge to compete effectively against distant
virtual stores.  Bouwman (1999) for example, points out that in many
parts of the world, there are local or regional language differences
that can be captured in the Web content to increase the appeal of the
site.  Local customs, tastes and product preferences will be known
by local merchants, but not necessarily distant virtual sellers.
Prominent local citizens who offer endorsements, reference to local
landmarks, awareness of important local events that may influence
purchase patterns, and many other local content strategies should
help make a merchants Web site more meaningful and appealing to the
local target market.  It would be difficult for globally-oriented Web
businesses to capture the same degree of local relevance.

In summary, we have outlined four categories which offer strategic
advantages to merchants who uses the Web to compliment their
physical business in a local community.  Whether they build upon
pre-established relationships to take advantage of trust, facilitate
their clients' ability to use the Web to access those services which
they would rather obtain remotely, or take advantage of local inside
information to develop promotional strategies, the local merchant who
supplements his business with a sophisticated Web site would appear to
have the upper hand over some remote online-only companies.  However,
there is a great deal we have yet to understand to help us pinpoint
the economic and social advantages held by the local merchant.  The
final section of our paper outlines a research agenda which can be
used in the long-term development of policy to maximize appropriate
commerce practices over the Internet.  Towards a Research Agenda

We suggest that there are indications, given the Internet market
research cited earlier and our preliminary studies over the past year,
that there is cause for concern at the local community level.  Our
discussion is largely speculative, however, and there is now a need
for more formal social and economic research to inform policy makers
and give guidance to community leaders.  Research in several areas now
appears warranted.

First, there is clearly a need to develop a rigorous and pervasive
system of monitoring the flows of electronic commerce activity, all
the way down to the individual and firm level of analysis.  Systems
for measuring on and offline purchasing activity, that not only
measures buyer location, but also seller location, are essential.
Given that existing DNS conventions make it difficult to identify
the location of buyers and sellers, alternative methods need to be
developed (OECD, 1998).  Largely, such information may need to be
reported at regular intervals by individual consumers and businesses,
perhaps through such mechanisms as the US Census.  At the May 1999
Digital Economy conference sponsored by the US Department of Commerce,
there were clear indications from the US Census Bureau that a new
set of electronic commerce measures would appear in upcoming surveys.
These are important first steps, especially since the data can then
easily be aggregated to the community level, state, and regional
level.  It would then be possible to estimate net gains and losses in
economic activity in communities, and to link these outcomes to other
social and economic indicators.

Another line of research suggested by our discussion is to identify
and then focus on the most vulnerable types of business (e.g., books,
music, travel services) and track the extent to which Web-based
commerce is associated with declining numbers of firms.

More broadly, research that looks for broad shifts in the nature of
businesses that flourish and those that disappear in various types of
communities would also be warranted.  Moreover, research that links
the changes in the business landscape to particular policies such as
local taxation of e-commerce, would help guide policy makers.

We can also suggest more individual and organizational level research.
An open question, for example, is how individual buyers are likely
to respond to locally-oriented Web strategies.  Does it truly enhance
trust, and is there any perceived value to such approaches from a
buyer perspective?  Empirical research can shed light on the viability
of the many different strategies that e-commerce observers suggest
for traditional businesses.  These include turning physically-based
retailing into more of an entertainment experience, emphasizing local
ties, and offering in-store Web access.

All of these research questions will provide data to help us better
understand the economic and quality of life impacts of electronic
commerce on local communities.  In addition, they will provide vital
information that can be used by local businesses to guide investment
decisions regarding physical and/or Web presence in a community.

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Footnotes

1. Although some evidence suggests that size of firm has less
relevance on Web retailing, given the relatively low costs to
establish a Web presence (Kennedy & Dietsch, 1995).  Nonetheless,
there is clear potential for a large retailer who then goes on the Web
to use their buying clout to acquire products at a lower per unit cost
than both small Web retailers or small physical retailers.

2. However, Sarkar, Butler & Steinfield (1995; 1998) present arguments
for increasing, rather than decreasing numbers of intermediaries in
the electronic commerce environment.

3. Bailey and Brynjolfsson (1997) report, for example, that in their
empirical analyses the prices of books, CDs and software were higher
on average on the Web than in Boston area stores.  Palmer (1997) found
no significant difference between in-store prices and prices in Web
stores, catalogs and cable TV shopping channels across a variety of
products.  One plausible explanation is that Web-merchants were simply
using a price discrimination approach that allowed them to find buyers
willing to pay extra for the added convenience of Web shopping.

4. Note that this is even more true for information products that can
be delivered electronically via the Internet.

5. In a 1997 GVU survey (GVU Center, 1997), more than half of all
respondents required or preferred an offline presence before shopping
on the Internet.  Results can be found on the Web at
http://www.cc.gatech.edu/gvu/user_surveys/survey-1997-10/graphs/vendor/Offline_Presence.html.

6. Consider for example, the inefficiencies resulting from a producer
buying needed inputs from a family member rather than a lower cost
competing supplier.

7.  Information on VALs and iVALs can be obtained from their Web site
at http://future.sri.com/vals/valsindex.html.

8. For example, music is normally thought to be an experience good.
Web sites such as CDNow, however, allow consumers to search by artist
or genre, and hear a short preview prior to purchasing music.