THEORETICAL APPLICATIONS

THEORETICAL APPLICATIONS



In this section, we apply the theories of TCE and RBV to analyze consumer choice of non-auction C2C online transaction community. The theories provide some plausible explanations of people’s choice of where best to conduct exchange. Based on the theories, we derive two competing propositions.



In this study, we focus on the physical items sold via online transaction communities. To simplify the comparison among different business models, we do not consider the auction style of C2C in eBay. Instead, we focus on eBay’s “Buy it now” mode, which is similar to the normal C2C activity in Amazon and Craigslist.


Transaction Cost Analysis



First, we apply the constructs from TCE to the analysis of various online transaction communities. Based on TCE, we argue that institutional mechanism affects transaction costs. Moreover, transaction costs in turn affect the choice of business channel. Production of trust is considered as one of the functions of institutional structures [42]. Trust had also been shown as a critical factor for the success of online marketplaces [18, 28, 32]. Different institutional mechanisms are employed to reduce transaction costs and induce trust. Trust and reputation mechanism receive a lot of attention from researchers in their studies of virtual community [12, 33, 40]. Online feedback rating system conveys the sellers’ reputation [28]. To sustain long term business relationship with online buyers, sellers are willing to build up their identity recognition and online reputation [30]. The online feedback rating reputation system does increase buyers’ trust towards the seller and induce buyers to pay price premiums [4, 29]. Trust building, identity recognition and reputation system of eBay and Amazon are shown as effective methods to decrease transaction cost and promote trade.



While the identity recognition and reputation system of eBay and Amazon was carefully studied in the literature, are there any other alternative institutional mechanisms to reduce transaction costs and perceived risk? The lack of attention on alternative institutional mechanisms in the literature of virtual transaction community motivates us to conduct this study.



Craigslist, by its very nature, does not employ the identity recognition and reputation system of eBay and Amazon. In Craigslist’s community model, local sellers and buyers are encouraged to have phone contact and meet face-to- face for spot market transactions with payments in cash. The option of being able to meet face-to-face for local




transactions – Craigslist’s institutional mechanism, along with other means of policing and supporting may migrate concerns of transaction risks and facilitate the market exchanges.



Craigslist’s institutional mechanism – option to meet face-to-face for local transactions, may have the effects of reducing information asymmetry [1, 21, 35]. Buyers have the chance of inspecting the goods physically when meeting sellers face-to-face. The opportunity to touch and feel the goods before the final purchase helps to mitigate certain concerns of buyers. By decreasing information asymmetry, Craigslist’s institutional mechanism helps to facilitate trade and materialize the mutual benefits from trade. In the eBay/Amazon’s case, from the user’s perspective, due to information asymmetry there might be some concerns of faulty product or outright online fraud from the other party.



Moreover, in Craigslist’s model, market exchange usually can be completed with cash payment on the spot. Thus, there is less concern of payment issue. Furthermore, the intermediary fulfilling the function of transfer money from buyers to sellers is bypassed. Removing intermediary such as banks, credit card companies, and PayPal also helps to reduce the transaction costs and promote market exchange. In the eBay/Amazon’s case, the presence of intermediary such as PayPal drives up the transaction cost.



Next, we evaluate other transaction cost related factors for the comparison between eBay/Amazon and Craigslist, such as commission fee imposed by the website and shipping cost. As mentioned before, eBay/Amazon does charge users for commission fee once the transaction happens. Therefore, for the users, the eBay/Amazon service is not totally free. EBay allows sellers to list up to 50 items a month for free and charges sellers only when an item is sold. Amazon has similar policy that enables sellers to list items on its website for free and charges commission fee only after the sale. On the other hand, Craigslist does not charge users transaction fee or commission fee. Thus, it is free for users to conduct business on Craigslist. Relieved from the liability of commission fee, users may view Craigslist as more attractive online communities for their transactions.



In the case of eBay/Amazon, usually there is shipping cost involved. For example, when a user sells a used book on Amazon to a buyer, the seller pays the shipping cost out of his/her pocket. The shipping fee charged by the vendor such as USPS is based on the shipping option the seller choses, the package weight and the shipping distance. Regardless of the real shipping cost, Amazon reimburses the seller $3.99 for the standard shipping option. In turn, Amazon charges the buyer the $3.99 shipping cost in addition to the listed book price. Whoever pays the shipping cost, it adds to the overall transaction cost. If the seller takes the burden of paying shipping cost (as some cases of free shipping service), the seller may charge higher price to compensate the shipping cost. In other words, shipping costs increase the transaction cost from the seller’s perspective. In the case of the buyer paying shipping cost, it seems that it does not affect the seller. However, it does reduce the possibility of that exchange happens. If the buyer can find the same product at the same price without shipping cost, he/she will opt for it. Shipping cost makes the transaction less likely to happen, holding everything else equal.



On the other hand, normally the business transactions originated from Craigslist are local in terms of geographical location. In most cases no shipping cost is involved, because the Craigslist transaction usually takes the form of face-to-face item-for-cash local transaction when exchange happens. Without the burden of shipping cost, users may regard Craigslist as more favorable online communities for their exchanges.