SPECIAL SECTION ‘E-BUSINESS IMPACTS REVISITED’
DOI: 10.1080/10196780500208756
Copyright ß 2005 Electronic Markets
Volume 15 (3): 213–224. www.electronicmarkets.org
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This paper examines how World Wide Web
(WWW) usage for procurement purposes
affects corporate buyers’ search costs and
buying organizations’ coordination costs
and how it ultimately affects the efficient
boundaries of buying organizations. The
analysis is based on a model that integrates
Transaction
Costs
Economics
(TCE)
(Williamson 1975, 1985) and forces of
electronic interconnections (Malone et al.
1987). Data collected from 110 corporate
buyers from over 100 organizations doing
business in a wide range of industries were
used to test the validity of the proposed
model. Findings show that WWW usage is
associated with a reduction of buyers’
search costs, which can give buying organizations the flexibility to increase their
base of suppliers when such an increase fits
their interest. No clear relationship was
found between WWW usage and the
reduction of coordination costs buying
organizations face to integrate their value
chain activities with those of their suppliers.
Findings show however that a WWW-based
reduction in coordination costs can give
buying organizations the flexibility to outsource certain activities when such a move
fits their interest. The TCE framework was
used to identify the transactions most likely
affected by these changes in buying organizations’ boundaries.
Keywords: e-markets, search costs,
coordination costs, transaction costs
A
u
t
h
o
r
s
Younes Benslimane
([email protected]) is an Assistant
Professor of Information Technology at
York University, Toronto, Canada. His
research interests include the economics
of IS and E-commerce.
Michel Plaisent
([email protected]) is a Professor
of MIS at the University of Quebec in
Montreal, Canada. His research interests
include e-commerce and e-learning.
Prosper Bernard
([email protected]) is a
Professor of Strategic Management at
the University of Quebec in Montreal,
Canada. His research interests include
strategic IS and e-commerce.
Investigating Search Costs and Coordination
Costs in Electronic Markets: A Transaction
Costs Economics Perspective
YOUNES BENSLIMANE, MICHEL PLAISENT AND PROSPER BERNARD
INTRODUCTION
Electronic commerce (EC) has
received much attention from
Information Systems (IS) researchers
and practitioners because it can
improve the performance of individual users (Bakos 1997; Barua et al.
1997)
and
of
organizations
(DeLone and McLean 1992, 2003;
Jones
and
Beatty
1998;
Mukhopadhyay et al. 1995). From
buyers’ perspective, EC is the use of
telecommunication networks for the
identification of potential suppliers,
the selection of business partners,
and the execution of transactions
(Choudhury et al. 1998). A narrow
definition of EC suggests that all
three activities be conducted online,
whereas a wider one, the one
adopted in this research, suggests
that at least one activity be supported
electronically
(Reimers
1996). Traditionally, EC has been
supported by complex and expensive
interorganizational systems (IOS)
and as a result, only a small fraction
of business transactions has been
conducted electronically (Barua and
Lee 1997; Scala and McGrath
1993).
In the 1990s, the World Wide
Web (WWW) emerged as a new and
valuable tool for EC and thousands
of vendors have set up commercial
websites to do business over the
Internet. These commercial websites
differ in terms of the functionalities
they provide: The simpler ones are
informational and the more complex
ones are transactional (Lightner
2004; Liu et al. 1997). Depending
on their functionalities, commercial
websites support, in whole or in
part,
electronic
transactions.
Transactional websites typically
include electronic catalogues, shopping carts, payment systems and
order tracking systems that offer
buyers a convenient and cost-effective way to support the procurement
process as they allow for the identification and the selection of suppliers
and the execution of business transactions. Commercial websites can
support both electronic hierarchies
– by linking an organization to its
sole supplier of a given input – and
electronic markets – by linking
multiple vendors and buyers.
Conducted from the perspective of
corporate buyers and buying organizations and based on a model that
integrates forces of electronic interconnections (Malone et al. 1987)
and Transaction Cost Economics
(TCE) (Williamson 1975, 1985), this
study analyses the relationships
between WWW usage for procurement
214 Younes Benslimane, Michel Plaisent and Prosper Bernard & Investigating Search Costs and Coordination Costs in Electronic Markets
and the productivity of corporate buyers and the
efficient boundaries of buying organizations.
LITERATURE REVIEW
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The evolution of the Transaction Costs Economics
framework
The Transaction Costs Economics (TCE) framework has
been used predominantly to analyse the efficient
boundaries of buying organizations (Bakos and
Kemerer 1992). It first originated in Institutional
Economics (Coase 1937; Williamson 1975, 1985) and
has later been extended and applied in the field of IS to
analyse the consequences of IOS usage on firms’
governance structure (Bakos 1997; Bakos and
Brynjolfsson 1997; Choudhury et al. 1998; Ciborra
1993; Gurbaxani and Whang 1991; Malone et al. 1987).
The original framework views the governance structure
within a dichotomy between markets, which refer to the
outsourcing of the activity, and hierarchies, which refer
to the internalization of an activity. The extended
framework introduces another dichotomist view of the
governance structure for an outsourced activity. In this
new context, the governance structure is viewed within a
dichotomy between markets, which refer to relying on a
pool of suppliers for a given input and hierarchies, which
refer to exclusive relationships between an organization
and its sole supplier for a given input. Both frameworks
are based on the assumptions of human opportunism
and bounded rationality, and aim at describing the
preferred governance structure for an organization.
With regards to the ‘make-or-buy’ decision, the
framework maintains that the choice for a given input
is based on a comparison of total costs of the alternative
options and that organizations tend to select the
governance structure that minimizes the total cost.
Two different views of such total cost can be found in
the literature, each one focusing on a particular aspect of
the cost of using the market. The first one, in accordance
with Williamson (1975, 1985), considers the total cost
as the sum of the production cost and the contractual
cost for producing or procuring the given input. The
second one, pioneered by Malone et al. (1987) and
further refined by Gurbaxani and Whang (1991), sees
the total cost as the sum of the production cost and the
‘operational’ cost for producing or procuring the given
input. An organization that relies on the market for a
given input tends to incur both operational and
contractual costs. Operational costs include search costs,
transportation costs, inventory holding costs and communication costs whereas contractual costs are the costs
of writing, monitoring and enforcing the contract
related to a given transaction.
Both views of the total cost suggest that production
cost for a given input tends to be lower in markets than in
hierarchies. Such a difference is due to the fact that
markets benefit from specialization effect and economies
of scale. Therefore, it is more cost-effective for an
organization that does not specialize in the production
of a given input to get that input from a supplier that
specializes in the production of such a component.
However, using the market can be expensive because it
makes the buying organization incur costs that would
not apply if it had produced the given input itself. A first
component of the market-related costs is the search cost,
which refers to the time and effort spent identifying
potential suppliers and selecting a vendor (Bakos 1997;
Ciborra 1993; Gurbaxani and Whang 1991; Malone et
al. 1987). A second component is the coordination
costs, which are the costs an organization incurs in order
to manage the flow of goods and services and synchronize its activities with those of its supplier (Ciborra 1993;
Clemons et al. 1993; Gurbaxani and Whang 1991;
Malone et al. 1987). The remaining component of such
market-related costs are the contractual costs, which refer
to the costs of writing, monitoring and enforcing a
contract in order to protect a buying organization against
the risks of information asymmetries and of loss of
bargaining power it may face when dealing with a
supplier (Ciborra 1993; Clemons et al. 1993; Gurbaxani
and Whang 1991; Williamson 1985). Malone et al.
(1987) summarized the trade-off between markets and
hierarchies in terms of relative production costs and
relative coordination costs arguing that relative production costs are higher in hierarchies and that relative
coordination costs are higher in markets.
The extended framework has focused on transactionrelated factors that help determine the optimal number
of suppliers for a given input. Three important factors
have been discussed: they are complexity of product
description, non-contractible investments and price
variability. Malone et al. (1987) have defined the
complexity of product description as the amount of
information needed to specify characteristics of a given
input. A higher level of complexity of product description increases the cost of searching the market prior to
each transaction, which makes hierarchy the preferred
option. Drawing upon the theory of incomplete
contracts, Bakos and Brynjolfsson (1997) have focused
on the investments in non-contractible resources a
transaction can require. Such non-contractible investments are by definition difficult to specify in a contract
and therefore require a mechanism to protect the buyer.
For such transactions, hierarchy is the preferred coordination mechanism as it helps build long-term relationships that prevent suppliers from behaving
opportunistically. Clemons et al. (1993) as well have
discussed the protection that buyers benefit from when
building exclusive relationships with their suppliers.
Grossman and Hart (1986) and Hart and Moore
(1990) have suggested that vertical integration (i.e.,
asset ownership) and the authority that it confers can
Electronic Markets Vol. 15 No 3
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help prevent opportunistic behaviour under incomplete
contracting. Finally, Lacity and Willcocks (1995, 1998)
have shown the limitations of outsourcing decisions that
were based on Transaction Costs Theory and have
presented selective outsourcing, experience and effective
contractual arrangements as better strategies for risk
mitigation. Finally, price variability in commodity
markets has also been considered relevant to decisions
related to the number of suppliers for a given input
(Bakos 1991a, 1991b, 1997; Choudhury et al. 1998;
Rosenthal et al. 1993). Researchers have argued that a
higher level of price variability in commodity market
makes the market the preferred option. In commodity
markets, a given input tends to be identical across all
vendors, which reduces both search costs and vulnerability to non-contractible investments. Moreover, price
variability provides buyers with the incentive to alternate
suppliers in order each time to get the needed input
from the seller with the lowest cost.
The role of forces of electronic interconnections
Malone et al. (1987) have been the first to link IOS
usage to firms’ efficient boundaries arguing that IOS
have electronic communication, brokerage and integration effects that help a buying organization reduce some
of the costs it incurs when using the market: the
electronic communication effect allows buyers to get
more and/or faster information from potential suppliers,
hence reducing the costs of communicating with
potential suppliers; the electronic brokerage effect allows
buyers to consider a larger pool of potential suppliers,
which permits them to select better the supplier of a
given input; the electronic integration effect allows
buyers to reduce the uncertainty related to crossorganizational flow of activities, consequently insuring
a tighter coupling of activities across adjacent value
chains. These effects can affect the governance structure
of organizations that have adopted such IOS. From this
perspective, two basic moves have been considered: the
first one relates to the decision to outsource activities
(Brynjolfsson et al. 1994; Ciborra 1993; Gurbaxani and
Whang 1991; Kambil 1991) and the second one relates
to the decision to increase the number of suppliers for a
given input (Bakos 1991a, 1991b; Bakos and
Brynjolfsson 1997; Barua et al. 1997; Choudhury et
al. 1998; Clemons et al. 1993; Malone et al. 1987).
Regarding the first move, researchers have argued that
forces of electronic interconnections can reduce specific
components of the market-related costs, making outsourcing certain activities become more cost-effective.
The electronic communication and brokerage effects of
IOS can help reduce buyers’ search costs whereas the
electronic integration can help reduce the coordination
costs a buying organization incurs in order to integrate
its value chain with that of its trading partner. Drawing
215
upon these three effects, IS researchers have argued that
more activities once internalized will be outsourced,
leading to a vertical disintegration of firms’ production
operations. Most of the IS research in this area has been
theoretical (Bakos and Brynjolfsson 1997; Clemons et
al. 1993; Clemons and Row 1992, 1993; Gurbaxani and
Whang 1991). Very few studies have empirically tested
the direct relationship between IOS usage and the move
to more outsourcing, and those who did, have relied on
secondary data from selected US industries: Kambil
(1991) found a positive correlation between information
technology (IT) investments and firms’ vertical disintegration whereas Brynjolfsson et al. (1994) found a
positive correlation between IT investments and the
decline in firm size. Other scholars have investigated the
relationship between IT investments and coordination
costs without referring to the move to more outsourcing. Instead, they focused on the increased
coordination requirements in contexts of vertical integration and of diversification and found that firms that
expand their operations to other lines of business tend to
invest more in IT, providing support for the idea that IT
can reduce coordination costs (Dewan et al. 1998; Hitt
1999). Some case studies analysed the effect of IOS
usage on coordination costs and their results were
consistent with the theoretical work linking IT usage to
reduction in coordination costs (Clemons and Row
1993; Iacovou et al. 1995; Jones and Beatty 1998; Kraut
et al. 1999; Mukhopadhyay et al. 1995).
As for the second move, researchers who have agreed
on the ‘firm disintegration’ hypothesis have referred to
two different yet complementary views of the activities
most likely involved in such disintegration. The first one
is known as the ‘move to the market’ hypothesis and was
pioneered by Malone et al. (1987). It suggests that
technological change causes transactions to be less assetspecific and to involve inputs that are easier to describe.
This will lead organizations using electronic markets to
broaden their base of suppliers for a given input because
the electronic communication and brokerage effects of
such systems help reduce the search costs buyers incur.
Such IOS make it easier for buyers to search for a better
deal each time they need to order an input. Bakos
(1991a, 1991b, 1997) has argued that this move to
‘more market’ is likely to prevail in electronic markets
trading commodity products where price-based competition is high. The second perspective proposed by
Clemons et al. (1993) and Bakos and Brynjolfsson
(1997), while taking into consideration the IOS-based
reduction of search and coordination costs, insists on the
necessity for firms to choose long term cooperative
relationships with their suppliers in order to protect
themselves against the risks of opportunistic behaviour.
Based on Bakos and Brynjolfsson (1997), such option is
likely to prevail in electronic markets trading noncommodity products that require more non-contractible
resources. Empirical evidence on this topic is very
216 Younes Benslimane, Michel Plaisent and Prosper Bernard & Investigating Search Costs and Coordination Costs in Electronic Markets
limited. Rosenthal et al. (1993) who investigated buyers’
intentions in a hypothetical electronic market in the
chemical industry found that the use of electronic
hierarchies would remain the preferred coordination
mechanism. Choudhury et al. (1998) analysed the
consequences of an electronic market in the aircraft
parts industry but did not directly test the effect of the
IOS usage on the size of the supply base of a given input.
They concluded however that by reducing buyers’ search
costs, IOS usage help lower prices and broker usage,
which may provide some support for the move to ‘more
market’. Finally, using a Delphi analysis of possible
consequences of Internet usage, Croom (2000) reported
that Internet usage is likely to lead to outsourcing of
maintenance, repair and operating (MRO) items to a
reduced number of suppliers.
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RESEARCH MODEL AND HYPOTHESES
Because research on the TCE-based effects of IOS usage
is mostly theoretical, many researchers have stressed the
need for a rigorous operationalization of relevant
concepts and testing of hypothesis (Bakos 1991b,
1997; Brynjolfsson et al. 1994; Clemons et al. 1993;
Clemons and Row 1992, 1993; Kraut et al. 1999;
Malone et al. 1987). The analysis of WWW usage for
business-to-business (B2B) transactions, which are
estimated to represent about 80% of the value and the
volume of all transactions conducted over the Internet
(Perkins 2001; Rosen and Howard 2000), gives the
opportunity to formally validate previous theoretical
work. The objective of this research is to analyse TCEbased effects of WWW usage on corporate buyers and
buying firms. It attempts to validate possible relationships between electronic markets usage, search costs,
coordination costs and moves to ‘more outsourcing’ and
to ‘more market’ for specific inputs. Figure 1 presents
the model that summarizes the hypothesized relationships. Each variable and relationship is discussed below.
Figure 1. Research model
WWW usage
The analysis of WWW usage for procurement purposes
should take into consideration the tasks and the types of
purchase corporate buyers execute. Basically, the procurement process includes three activities: the identification of potential suppliers, the selection of a business
partner and the execution of the transaction
(Choudhury et al. 1998; Novak and Simco 1991). The
WWW helps buyers identify a set of potential suppliers of
a given input as thousands of vendors have set up their
websites in order to do business over the Internet
(Ghosh 1998; O’Connor and O’Keefe 1997; Poon and
Swatman 1999). Also, when pricing and other relevant
information are made available on commercial websites,
the WWW allows buyers to select a business partner for
the pondered transaction (Bakos 1997; Barua et al.
1997). Finally, when vendors have set up transactional
websites, buyers can execute their transactions online by
placing orders, making payments and checking the status
of their orders online. Based on supply chain management literature, straight re-buys (hereafter called routine
purchases) must be distinguished from modified re-buy
or new buy (hereafter called non-routine purchases) as
each type of purchase may require a different usage of
the WWW. Typically, a routine purchase requires little or
no additional information to be completed, whereas a
non-routine purchase involves some complexity and
therefore requires that corporate buyers first search for
information about the input, about its price and about
potential suppliers (Novack and Simco 1991).
Reduced search costs
Search costs refer to the time and effort a buyer spends
to access the information needed to identify potential
suppliers of a given input and to select a vendor (Bakos
1991a, 1991b, 1997; Barua et al. 1997; Choudhury et
al. 1998; Ciborra 1993). The WWW has an electronic
communication effect and an electronic brokerage effect
Electronic Markets Vol. 15 No 3
that allow buyers to get more and/or faster information
from potential suppliers and to better select a supplier
respectively (Malone et al. 1987).
Hypothesis 1: WWW usage will be positively related to a
reduction of search costs.
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Reduced coordination costs
Coordination costs refer to the efforts deployed in order
to manage interdependencies among activities.
According to Clemons and Row (1993: 74), ‘problems
in coordination stem from uncertainty due to insufficient information or information processing capacity …
across firm boundaries.’ The coordination costs are the
costs buying organizations face to reduce that uncertainty, leading to an integration of their value chain
activities with those of their suppliers (Ciborra 1993;
Clemons and Row 1993; Gurbaxani and Whang 1991;
Malone et al. 1987). Transactional websites provide
additional information and processing capacity that can
allow for a reduction of these coordination costs.
Hypothesis 2: WWW usage will be positively related to a
reduction of coordination costs.
217
researchers have argued that IOS help reduce the
external coordination costs, making it more efficient to
externalize certain activities (Bakos and Brynjolfsson
1997; Brynjolfsson et al. 1994; Ciborra 1993; Clemons
et al. 1993; Gurbaxani and Whang 1991). TCE
literature suggests that transactions occurring at a lower
frequency and involving standard inputs are likely to be
affected by such a move because (1) low-frequency
activities do not benefit from economies of scale and
specialization effects and outsourcing them should be
more cost-effective and (2) such activities involve
standard inputs, which reduces the information, contracting and monitoring costs buying firms would incur.
Suppliers’ transactional websites can help decrease
coordination costs, encouraging organizations to outsource some activities in order to benefit from a lower
total cost.
Hypothesis 4: Reduced coordination costs will be positively
related to the move to ‘more outsourcing’ for low-frequency
transactions involving standard inputs.
METHODOLOGY
Research design and source for data
More market
The move to ‘more market’ refers to an increase in the
pool of suppliers for a given input following the
reduction in search costs associated with the electronic
communication and brokerage effects of the WWW. IS
researchers have argued that, just because they are
conducted in electronic marketplaces, some transactions
turn out to be executed among a larger number of
suppliers (Bakos 1991a, 1991b, 1997; Bakos and
Brynjolfsson 1997; Barua et al. 1997; Choudhury et al.
1998; Malone et al. 1987). TCE literature suggests that
transactions occurring at a lower frequency and involving
standard inputs are likely to be affected by such a move:
for such transactions, buying firms using electronic
markets incur no switching costs and benefit from an
increased competition among suppliers. Therefore, they
tend to move to ‘more market’ as it becomes easier for
their buyers to search the market for the ‘best’ deal each
time they have to purchase the given inputs.
Hypothesis 3: Reduced search costs will be positively related to
the move to ‘more market’ for low-frequency transactions
involving standard inputs.
More outsourcing
The move to ‘more outsourcing’ can be a consequence
of the electronic integration effect of the WWW. IS
A survey was used to collect data on the evolution of
search costs and coordination costs in WWW-based
electronic marketplaces. In Spring 2001, a questionnaire
was sent to each buyer member of the ‘Corporation des
Approvisionneurs’ in the province of Quebec, Canada,
an organization affiliated to the Purchasing
Management Association of Canada. Within six weeks,
of the 988 questionnaires sent, 110 usable ones were
completed and returned for a response rate of approximately 11.2%. The sample spanned corporate buyers
from over 100 organizations doing business in a wide
range of industries.
Operationalization of constructs
Except for WWW usage, no pre-existing instruments
could be located. Therefore, new scales based on
relevant literature were developed and tested for
reliability and validity. Following Churchill’s (1979)
guidelines, multiple item-scales measuring the investigated constructs were developed. In accordance with
Nunnally (1988), seven-point Likert scales were used to
ensure statistical variability among survey responses. The
instrument was pilot-tested with five corporate buyers,
one EC consultant and four IS researchers and their
suggestions helped develop the final questionnaire. The
section of questionnaire used for this research is
presented in Appendix A.
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218 Younes Benslimane, Michel Plaisent and Prosper Bernard & Investigating Search Costs and Coordination Costs in Electronic Markets
The instrument developed by Massetti and Zmud
(1996) was adapted to measure WWW usage (USE) for
both routine and non-routine purchases. Three items for
each type of purchase were used: they are the importance
of the number of purchases, of the dollar amount of
purchases and of the percentage of suppliers dealt with
using the WWW. The Reduced Search Costs (RSC)
construct was measured in terms of increased information obtained from alternate vendors, of ease of locating
potential suppliers, and of improved selection process for
the product or service to be bought (Bakos 1991a,
1991b, 1997; Barua et al. 1997; Choudhury et al. 1998;
Ciborra 1993; Malone et al. 1987). The Reduced
Coordination Costs (RCC) construct was measured in
terms of reduced paperwork, reduced clerical errors,
increased data transmission speed, reduced lead times,
reduced inventory costs and reduced stockout problems
(Clemons and Row 1993; DeLone and McLean 1992,
2003; Iacovou et al. 1995; Jones and Beatty 1998;
Reekers and Smithson 1996; Scala and McGrath 1993).
Finally, two new three-item scales based on relevant
TCE literature were developed to assess the move to
More Outsourcing (MO) (Gurbaxani and Whang 1991;
Williamson 1975, 1985) and the move to More Market
(MM) (Bakos and Brynjolfsson 1997; Choudhury et al.
1998; Clemons et al. 1993; Malone et al. 1987) and to
identify the activities and inputs most likely to be
affected by such moves.
The reliability of the scale was assessed using the
Cronbach alpha. No item deflated alpha, so all were
kept. The range for all alphas varied from .82 to .95,
which indicates a high degree of consistency between the
multiple items measuring each construct. The validity of
the scale was assessed using a factor analysis. The
principal components method with Varimax rotation
was used to extract the five factors included in the
analysis. A factor loading greater than .50 with the
theoretically correct sign was required for the assignment of an item to a factor. The results of the factor
analysis confirmed the validity of the scale. The score for
each retained factor equalled the mean score of its
retained items. Table 1 summarizes the results for the
reliability and validity analyses.
DATA ANALYSIS
Profile of respondents
Table 2 presents the descriptive statistics for our sample.
By job title, respondents were directors (26.9%),
Table 1. Validity, reliability and descriptive statistics for constructs
Mean
St. Dev.
Alpha
RUSE1
RUSE2
RUSE3
NRUSE1
NRUSE2
NRUSE3
RSC1
RSC2
RSC3
RCC1
RCC2
RCC3
RCC4
RCC5
RCC6
MO1
MO2
MO3
MM1
MM2
MM3
WWW usage
Reduced search
costs
Reduced
coordination costs
More outsourcing
More market
2.59
1.29
.91
5.32
1.37
.83
3.30
1.47
.92
2.35
1.15
.95
4.22
1.55
.83
.899
.868
.665
.899
.903
.657
.798
.868
.685
.730
.810
.798
.826
.886
.879
Rotated component matrix showing coefficients with values equal to or greater than .5
.898
.932
.901
.783
.835
.800
Electronic Markets Vol. 15 No 3
219
Table 2. Respondents’ profile
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Respondents’ profile
Frequency (%)
Industry
Manufacturing
Retail
Service
EDI usage
Yes
No
Hierarchy level
Director
Manager
Senior Buyer
Buyer
Early respondent
Yes
No
Age
20–29
30–39
40–49
50–59
Annual volume of transactions ($)
Less than 5 millions
5 millions - 10 millions
10 millions - 20 millions
Over 20 millions
Task Supported by the WWW
(Average on a 7-point Likert scale)
Identification
Selection
Execution
53.8
38.7
7.5
31.8
68.2
26.9
9.3
30.6
33.2
61.4
38.6
3.4
36.8
32.2
27.6
26.4
18.1
19.4
36.1
5.7
4.1
2.5
managers (9.3%), senior buyers (30.6%) and buyers
(33.2%). The most common age group of respondents
was 30–39 (37%), followed by 40–49 (34.3%), 50–59
(25%) and 20–29 (3.7%). The majority of the respondents worked in the manufacturing sector (53.8%),
followed by those in the retail industry (38.7%) and
those in the service sector (7.5%) and 31.8% of them
worked in organizations that used electronic data
interchange (EDI) systems to support their procurement
process. In terms of annual volume of transactions, the
respondents had purchased on average over $24 millions
worth of input. Results based the seven-point scale show
that corporate buyers use the WWW essentially to
identify potential suppliers (5.7) or to select a supplier
(4.1) and less to execute a transaction (2.5) and that on
average the level of WWW usage for procurement
purposes remains low (2.6).
An additional screening assessed the non-response
bias by comparing early respondents (i.e., those who had
sent a completed questionnaire within the first three
weeks) to late respondents (i.e., those who had sent a
completed questionnaire after the third week) on the
basis of the constructs under study. The rational for this
screening is that late respondents are likely to have
similar characteristics to non-respondents (Armstrong
and Overton 1977). None of the five tests (a55%)
indicated significant differences between the two groups,
which suggests that there was no non-response bias.
Finally, with regards to the relationships between
respondents’ profile and the constructs under study,
the only significant difference was for the level of WWW
usage among buyers in the retail industry (Mean52.98)
and those in the manufacturing sector (Mean52.33).
Table 3 summarizes the results of these tests.
Table 3. Respondents’ profile and non-response tests
Effect on Constructs under Study
Profile factors
Industry
EDI usage
Hierarchy level
Early respondent
Age
Volume of
transactions
WWW usage
F5.3.495
Sig.5.034
t5.825
Sig.5.441
F5.824
Sig.5.442
t5.628
Sig.5.534
F5.663
Sig.5.577
F5.595
Sig.5.694
Reduced search costs Reduced coordination costs
F51.563
Sig.5.214
t5.988
Sig.5.342
F5.082
Sig.5.922
t51.590
Sig.5.114
F5.657
Sig.5.592
F5.818
Sig.5.517
F5.394
Sig.5.675
t5.604
Sig.5.551
F51.000
Sig.5.371
t51.466
Sig.5.197
F5.447
Sig.5.720
F5.582
Sig.5.677
More outsourcing
F51.148
Sig.5.321
t52.015
Sig.5.988
F51.594
Sig.5.208
t51.428
Sig.5.560
F5.087
Sig.5.967
F5.443
Sig.5.776
More market
F5.233
Sig.5.792
t5.791
Sig.5.431
F51.631
Sig.5.077
t51.300
Sig.5.218
F5.802
Sig.5.495
F5.362
Sig.5.835
220 Younes Benslimane, Michel Plaisent and Prosper Bernard & Investigating Search Costs and Coordination Costs in Electronic Markets
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Method of analysis
rho was .346 (Sig.5.000) and the computed t value was
23.142 (Sig.5.003).
Two statistical techniques were used to test the research
hypotheses on WWW usage for procurement purposes.
First, because all the variables under study were metric, the
Pearson correlation was used to test the hypothesized
relationships. Second, WWW usage, reduced search costs
and reduced coordination costs were later recoded into
variables distinguishing, for the first variable, the group of
respondents with a high level of WWW usage (i.e., topthird of users) from the group with a low level of WWW
usage (i.e., bottom-third of users); for the second variable,
the group of respondent who experienced an important
reduction of search costs from the group with the lowest
reduction of search costs; and for the third variable, the
group of respondents who experienced an important
reduction of coordination costs from the group with the
lowest reduction of coordination costs. In all three cases,
the group in the middle was discarded. For each recoded
variable, the two groups were of comparable size and t tests
were used to assess the stability of the results from
the Pearson correlation. A 5% level of significance was used
for all the statistical tests. Findings are summarized in
Table 4.
Hypothesis testing
Hypothesis 1. Results of both the Pearson correlation
and the independent-sample t test show that WWW
usage is significantly associated with a reduction in
corporate buyers’ search costs. The computed Pearson’s
Hypothesis 2. Findings from the two tests show
conflicting results. Whereas the Pearson correlation
(rho5.231 and Sig.5.015) shows that WWW usage is
significantly associated with a reduction in coordination
costs, the t test shows no support for the hypothesized
relationship
(computed
t
value521.573
and
Sig.5.121).
Hypothesis 3. Findings from both tests show support
for the positive relationship between reduced search
costs and the move to ‘more market’. The Pearson’s rho
and the computed t were .501 (Sig.5.000) and 23.993
(Sig.5.000) respectively.
Hypothesis 4. Results of both statistical tests support
the expected relationship between reduced coordination
costs and the move to ‘more outsourcing’. The
Pearson’s rho was .442 (Sig.5.000) and the computed
t was 24.803 (Sig.5.000).
DISCUSSION
The WWW is an electronic marketplace that links users
acting as potential buyers to thousands of vendors that
have set up commercial websites. Corporate buyers
using the WWW to carry out their procurement tasks can
expect some benefits. These benefits would depend on
the commercial websites’ functionalities buyers use
during the procurement process.
Table 4. Hypotheses testing
Hyp.1 RSC
Hyp.2 RCC
Hyp.3 MM
Hyp.4 MO
High-level users (N534)
Low-level users (N532)
Mean
Mean
St. Dev.
4.48
1.65
2.87
1.46
Users with low RSC (N533)
Mean
Mean
23.142
21.573 (NS)
Computed t (t test)
.346**
.231*
Pearson’s rho (N5110)
23.993
Computed t (t test)
.501**
Pearson’s rho (N5110)
24.803
.442**
St. Dev.
4.99
1.57
Users with high RCC (N533)
3.46
1.56
Users with low RCC (N534)
Mean
St. Dev.
Mean
St. Dev.
3.02
1.44
1.70
0.66
** Significant at the .01 level
* Significant at the .05 level
(NS) Not significant at the .05 level
Pearson’s rho (N5110)
St. Dev.
5.64
1.32
3.45
1.54
Users with high RSC (N534)
St. Dev.
Computed t (t test)
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Electronic Markets Vol. 15 No 3
When using the WWW to support their identification
and selection tasks, corporate buyers can expect to
reduce their search costs. Our findings show that WWW
usage is associated with a reduction in search costs,
which may suggest that WWW electronic communication and brokerage effects help corporate buyers to
quickly and easily identify potential suppliers and, when
the relevant information is available on the websites, to
select their suppliers better.
When using the WWW to place orders, make
payments or check the status of their purchases,
corporate buyers can benefit from its electronic integration effect, that is, the additional information and/or
additional information processing capacity that help
buying organizations reduce their external coordination
costs. Results of this survey do not clearly support the
hypothesized relationship between WWW usage and
reduced coordination costs: only the correlation analysis
shows support for the relationship and that relationship
is not as strong as the one between WWW usage and
reduced search costs. Such finding may appear surprising
when an abundant IS literature presents the decrease of
coordination costs as a consequence of IOS usage. A
possible explanation is that IS literature has investigated
IOS such as Electronic Data Interchange, Value Added
Networks and other proprietary electronic marketplaces
used extensively for the online execution of transactions
and that tend to be more integrated to other IS in
buying organizations. In this context, benefiting from
WWW-based reduced coordination costs would imply
first that corporate buyers are extensively using transactional websites and second that suppliers’ transactional
websites are – to some extent – integrated to buying
organizations’ IS. Descriptive statistics for our data set
show that respondents use the WWW essentially to
identify and select suppliers and marginally to execute
transactions. As a result, WWW usage should be more
associated with a reduction in search costs than with a
reduction in coordination costs. As for the possible
integration of a buying organization’s IS to a supplier’s
commercial website, although not measured in this
research, one may expect it to be low as the power of the
WWW stems from the fact that it is an open electronic
marketplace that requires no particular IT investment
from buying organizations. Another possible explanation is that this ‘free for all IOS’ does not help test for
trust and cooperation between business partners. Trust
and cooperation have been found to influence IOS
adoption, as these IOS often require that partners invest
in specific assets that would have a much lower value in
an alternative use should the original business relationship be prematurely terminated (Williamson 1985).
From this perspective, one can argue that the uncertainty
responsible for the coordination problem is not reduced
only by additional information and information processing capacity but also by trust and cooperation between
business partners (Iacovou et al. 1995) and by personal
221
and social relationships that may not be easily developed
through electronic interfaces (Kraut et al. 1999; Uzzi
1997).
WWW-based reductions in search costs and in
coordination costs are themselves associated with
changes in organizations’ boundaries. In accordance
with past theoretical research, our model suggests that
transactions involving standard inputs and occurring at a
lower frequency are likely to change governance
mechanisms as a result of such reductions in search
costs and coordination costs. For those transactions, the
reduction in coordination costs is associated with a move
to ‘more outsourcing’, whereas the reduction in search
costs is associated with a move to ‘more market’,
implying that buyers will deal with new and more
suppliers in order to reduce the total cost of inputs. Our
data show evidence for both moves. First, respondents
who report important reductions in coordination costs
tend to also report a distinctive shift to ‘more outsourcing’. Based on the TCE framework, low-frequency
activities do not benefit from economies of scales or
specialization effect and should have a lower production
cost in the market. The WWW-based reduced coordination costs and the lower production cost in the market
make outsourcing these activities a logical solution. This
shift to outsourcing is even more likely to occur when
the activity to be externalized involves a standard input,
which is normally widely available on the market.
Second, respondents who report important reductions
in search costs tend to also report an important move to
‘more market’. As an electronic marketplace, the WWW
can reduce buyers’ search costs and increase price-based
competition among vendors, making it easy and valuable
for users to search the market for a better deal before
purchasing inputs. In accordance with TCE-based
literature, results from this survey show that transactions
occurring at a low frequency and involving standard
inputs are more likely to be subject to that shift because,
normally, they do not benefit from price discounts and
are considered low risk. Because of the low risk
associated with standard inputs and of the absence of
price discounts associated with infrequent purchases,
buyers face no switching costs. This absence of switching
costs, the reduced search costs and the increased pricebased competition in such electronic marketplaces make
the shift from electronic hierarchies to electronic markets
a logical solution.
It should, however, be noted that, based on descriptive statistics from Table 4, the move to ‘more market’ is
more distinctive than the move to ‘more outsourcing’.
This suggests that WWW usage is more often linked to
organizations dealing with new suppliers for inputs they
were already buying than for inputs they were producing
themselves. This limited move to ‘more outsourcing’
may be due to the less important reduction in
coordination costs previously discussed. It may also be
due to a restricted number of activities eligible to such a
222 Younes Benslimane, Michel Plaisent and Prosper Bernard & Investigating Search Costs and Coordination Costs in Electronic Markets
move. Ideally, future research should assess how many
activities eligible to such a move were carried out
internally prior to WWW usage and then assess how
many were outsourced as a result of WWW usage. Such a
review could determine whether or not the limited move
to ‘more outsourcing’ is simply due to the fact
that organizations are already focusing on their core
activities.
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CONCLUSIONS
Findings from this study indicate that the WWW can be
used to support the procurement process. Its electronic
communication and brokerage effects are found to be
associated with a reduction of corporate buyers’ search
costs, which in turn, is associated with an increase in the
base of suppliers for low-frequency transactions involving standard inputs. Results of this study show however
no clear support for the electronic integration effect of
the WWW. Nonetheless, they indicate that the WWWbased reduction in coordination costs is associated with a
shift to outsourcing. In accordance with TCE literature,
low-frequency activities involving standard inputs are
more likely to be outsourced.
The contribution of this research is two-fold. The
first contribution is to research. Many IS researchers
have stressed the need for studies that formally validate
previous theoretical and anecdotal work on the TCEbased effects of electronic markets usage. This study,
which involved 110 corporate buyers from over 100
organizations operating in multiple industries, fills that
gap and aims to advance our understanding of the
possible consequences of using electronic marketplaces
for procurement purposes. However, similar studies in
different settings are necessary to verify the generalizability of our results. Further research should also
take into account additional factors that can explain the
difference in reduction between search costs and
coordination costs and the difference in strength
between the move to ‘more market’ and the move to
‘more outsourcing’. The second contribution is to
practice, as this research gives buyers, vendors and
intermediaries insights on WWW usage for EC purposes. This study demonstrates that, by supporting the
procurement process, the WWW can improve the
performance of both buyers and buying organizations.
Second, it shows that, if a web presence can be
rewarding, vendors in electronic markets concerned
with profitability must be ready to face the increased
competition. This research finally indicates that the
WWW can affect intermediaries by either threatening
their survival as it helps reduce buyers’ search costs or
by offering them new opportunities as it creates new
needs for buyers and vendors in electronic marketplaces.
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Appendix A: Sections of the questionnaire used in this research