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Ecommerce company pricing

From Inframarginal Versus Marginal Analysis of Networking Decisions and e-Commerce
Yew-Kwang Ng

The inframarginal analysis of impersonal networking decision can also be extended to explain the unusually high P/E ratio of many e-commerce companies. If positive network effects of e-commerce can be created by founding of many e-commerce companies, but services provided by these companies are not easy to directly price, then the merger of e-commerce companies and other companies which sell tangible goods can indirectly price intangible e-commerce services via implicit bundling in e-commerce. The story about bundling between automobiles and internet purchase services is an example. Other examples include the merger of the AOL and Warner Brothers, which bundles intangible services of the AOL with tangible goods provided by Warner Brothers, and Amazon.com which bundles intangible e-commerce with tangible hard copies of books. Hence, some e-commerce companies can have unusually high P/E ratio since the market expects that such companies may be merged or bought by other companies selling tangible goods at quite high share prices if they really create significant network effects of division of labour. This phenomenon is difficult to explain using marginal analysis in the existing literature of bundling and tying sale.

Economics, ecommerce

Also, internet virus and e-commerce fraud generate huge loses to world economy. Use of e-currency may create more opportunity for easy theft, just like monitarisation of commerce created more opportunity for pick-pocket in the past two centuries. All of the new phenomena call for institutional innovation and new policies that cannot be sorted out in the absence of government actions. Should the government institute a licensee system for e-commerce and an internet police system to address the new phenomena of e-commerce and internet economy?

Recent many economic theories and models are developed to investigate impersonal networking decisions and strategic networking decisions. Inframarginal analysis (total cost-benefit analysis across corner solutions in addition to marginal analysis of each corner solution) is a feature of the literature. The inframarginal analysis of networking decisions is much more powerful than conventional marginal analysis for explaining e-commerce phenomena.

Communication

Increasing income share of communication cost. The cost to delete useless message increases as communication efficiency increases. This is a typical network phenomenon: as communication efficiency increases, search scope enlarges, and income share of cost for deleting information that is not finally used increases. Another example of this phenomenon is that the city that upgrades transportation and communication infrastructure most rapidly has the most serious traffic jum. This network development phenomenon of increasing income share of transaction cost might be efficient as long as positive network effect of expanding network on aggregate productivity outweighs increasing transaction and communication costs.
*   As the reliability of each communication connection efficiency increases, the efficient reliability of the whole network decreases. In other words, aggregate risk of coordination failure of an increasingly larger network of e-commerce increases. Many news on devastating impacts of internet virus and paralysis of the whole network caused by paralysis of a link in the network provide evidences for this phenomenon.

Ecommerce

*   High P/E ratio of e-commerce and internet companies (300 or even higher) is out of proportion of any wild expectation. In particular, such high P/E ratio is usually associated with negative and declining profit of e-commerce companies due to the tendency of free provision of increasingly more e-commerce services. What is economic mechanism of this phenomenon that is inconsistent with the existing economic wisdom.
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*    Due to efficient increases in transaction costs (including the increases in risk for coordination failure and in the tangible amount of resources allocated to deleting unwanted message), many new economic issues become the focus of social debate and policy making. For instance, development of internet makes more difficult for employers to monitor employees. Many employers complain that internet generates a great deal of lose to them since employees now spend most of working time surfing on internet for company business unrelated affairs. Some software is developed for employers monitoring employees’ use of internet. Some employees take the matter to the court to claim that their privacy is infringed upon. Some employees have won the litigation. Will the size of the firm decrease due to more disintegration, outsourcing, down-sizing and less employment within the firm? If the employers win the case, will a larger market for software of monitoring the use of internet by employees emerge? Another heating debate is about reforms of the patent system. In 1999, more than two thousand internet related patents are registered. Somebodies propose to shorten length of patent protection of an e-commerce related invention and to speed up patent approval process.