Electronic Markets, Search Costs, and Firm Boundaries

We study how electronic markets that facilitate broader inter-firm transactions affect the vertical scope of emerging IT-enabled extended enterprises. We do so by modeling firms in a three-tier value chain who are each connected to a common electronic market that facilitates direct business transactions across tiers, and that lowers the search costs associated with finding an appropriate trading partner for each of them. The extent to which search costs are reduced depends on the complexity of B2B search, and the nature of the supporting technologies that the electronic market facilitates. Variation in search costs affect firms across the value chain in three key ways: by a change in the transaction costs of interaction between firms; by a change in the contracting costs associated with outsourcing owing to changes in the costs of moral hazard for delegated search, and by a change in the price dispersion of upstream input commodities. We capture each of these effects in a new m...

• Type: Journal
• Year: 2010
• Where: ISR
• Authors: Ramesh Sankaranarayanan, Arun Sundararajan
• Keywords: B2B Search, Distributed And Parallel Computing, Electronic Markets, ISR 2010, Search Costs