Yannis Bakos

The emerging role of electronic marketplaces on the Internet

Markets play a central role in the economy, facilitating the exchange of information, goods, services and payments. In the process, they create economic value for buyers, sellers, market intermediaries and for society at large. Recent years have seen a dramatic increase in the role of information technology in markets, both in traditional markets, and in the emergence of electronic marketplaces, such as the multitude of Internet-based online auctions.

Shared Information Goods

Once purchased, information goods are often shared within small social communities. Software and music, for example, can be easily shared among family or friends. In this paper, we ask whether such sharing will undermine seller profit. We reach several surprising conclusions. We find, for example, that under certain circumstances sharing will markedly increase profit even if sharing is inefficient in the sense that it is more expensive for consumers to distribute the good via sharing than it would be for the producer to simply produce additional units. Conversely, we find that sharing can markedly decrease profit even where sharing reduces net distribution costs. These results contrast with much of the prior literature on small-scale sharing, but are consistent with results obtained in related work on the topic of commodity bundling. Our findings highlight the relative importance of demand reshaping, as opposed to cost considerations, in determining the profitability effects of sharing. Copyright 1999 by the University of Chicago.

Aggregation and Disaggregation of Information Goods: Implications for Bundling, Site Licensing and Micropayment Systems

We analyze pricing strategies for digital information goods that are based on aggregation or disaggregation. Bundling, site licensing, and subscription pricing can be analyzed as strategies that aggregate consumer utility across different goods, different consumers, or different time periods, respectively. Using micropayments for rental of software “applets,” or other discrete units of information, can be thought of as disaggregation. We show that reductions in marginal costs made possible by low-cost digital processing and storage of information will favor aggregation of information goods, while reductions in transaction and distribution costs made possible by ubiquitous networking tend to make disaggregation more profitable.

Cooperation Without Enforcement? A Comparative Analysis of Litigation and Online Reputation as Quality Assurance Mechanisms

Commerce depends on buyers and sellers fulfilling their contractual obligations; mechanisms inducing such performance are essential to well-functioning markets. Internet-enabled reputation mechanisms that collect and disseminate consumer feedback have emerged as prominent means for inducing seller performance in online and offline markets. This paper compares the ability of reputation and more traditional litigation-like mechanisms for dispute resolution to induce efficient economic outcomes. We use a game-theoretic formulation and derive results for their relative efficiency and effectiveness individually or as complements. We find that the popular view of reputation as an efficient and relatively costless way to induce seller effort under all circumstances is incorrect; reputation is less efficient than litigation in inducing any given level of effort. Thus, reputation improves efficiency only in settings where the high cost of litigation, insufficient damage levels, or low court accuracy induce suboptimal effort or cause market failure. When adverse selection is important, reputation helps reveal the true types of market participants, which may offset its higher cost of inducing effort. Finally, adding reputation to existing litigation mechanisms increases seller effort and may require adjusting damage awards to avoid inducing excessive effort that reduces economic efficiency. This paper was accepted by Lorin Hitt, information systems.

Organizational Partnerships and the Virtual Corporation

Organizations are transforming their relationships with their business partners. For example, instead of playing off dozens or even hundreds of competing suppliers against each other, many firms are finding it more profitable to work closely with only a small number of “partners”. While these firms generally increase their amount of outsourcing, by focusing on a small number of partners they create value networks that are often referred to as “value-added-partnerships”, “virtual organizations” or “modular corporations”. In this work we explore some causes and consequences of this transformation. We apply the economic theory of incomplete contracts to study the optimal number of business partners, with particular attention to the role of information technology. Surprisingly, we find that organizations will often maximize profits by limiting their options and reducing their own bargaining power. This may seem paradoxical in an age of cheap communications costs and aggressive competition. However, unlike earlier studies that focused on coordination costs, we focus on the critical importance of providing incentives for business partners. Our results spring from the need to make it worthwhile for business partners to invest in “non-contractibles” like innovation, responsiveness and information sharing. Such incentives will be stronger when the number of competing partners is small. The findings of the theoretical models appear to be consistent with observations from empirical research which highlight the key role of information technology in enabling this transformation.

Does Anyone Read the Fine Print? Consumer Attention to Standard Form Contracts

A cornerstone of the law and economics approach to standard form contracts is the Oinformed minorityO hypothesis: in competitive markets, a minority of term-conscious buyers is enough to discipline sellers from offering unfavorable boilerplate terms. The informed minority argument is widely invoked to limit intervention in consumer transactions, but there has been little empirical investigation of its validity. We track the Internet browsing behavior of 45,091 households with respect to 66 online software companies to study the extent to which potential buyers access the standard form contract associated with software purchases, the end user license agreement. We find that only one or two out of every thousand retail software shoppers chooses to access the license agreement, and those that do spend too little time, on average, to have read more than a small portion of the license text. The results cast doubt on the relevance of the informed minority mechanism in a specific market where it has been invoked by both theorists and courts and, to the extent that comparison shopping online is relatively cheap and easy, suggest limits to the mechanism more generally.

Information Technology, Repeated Contracts, and the Number of Suppliers

Many theories address how information technology IT affects the number of suppliers and supply chain governance. However, their predictions are at times contradictory and there is relatively little empirical evidence with which to evaluate them. We therefore develop an integrated, multiperiod model of the optimal number of suppliers that combines search and coordination theory, transaction cost economics, and incomplete contracts theory, and we assess our theoretical predictions using a large new data set on the global IT sourcing decisions of 1,355 firms in 12 countries. Our empirical results support three key predictions about trust, IT, and supply base size. First, investments in coordination IT, which reduce search and coordination costs, are correlated with using more suppliers, while use of vendor-specific IT is associated with fewer suppliers. Second, repeated relationships and trust play a major role in supply chain governance. As firms work with fewer suppliers, they also engage in more repeated relationships. At the same time asset specificity and the need to induce relationship-specific investments are correlated not only with fewer suppliers, but also with a larger fraction of repeated relationships. Third, supply chain governance differs in human capital-intensive and physical capital-intensive industries. The correspondence between asset specificity and repetition is strong in physical capital-intensive firms and not significant in human capital-intensive firms, while the correspondence between fewer suppliers and more repeated relationships is strong in human capital-intensive firms but not significant in physical capital-intensive firms. This corroborates the differential implications of human and physical capital for bargaining power, contractual risk, and trust in buyer-supplier relationships. The online appendix is available at https://doi.org/10.1287/mnsc.2016.2631 . This paper was accepted by Chris Forman, information systems.

I.T., Repeated Contracts and the Number of Suppliers

We develop an integrated, multi-period model of the optimal number of suppliers that combines considerations from search and coordination theory, transaction cost economics, and incomplete contracts theory. We assess our theoretical predictions using a new dataset on the global IT sourcing decisions of 1355 firms in 12 countries collected using a survey that we specifically designed to test our theory. Our empirical results support three key theoretical predictions about trust, fit and IT. First, repeated relationships and trust play a major role in supply chain governance. Several results together support this conclusion: (a) as firms work with fewer suppliers they also engage in more repeated relationships with those suppliers; (b) organizational and technological asset specificityand the need to induce relationship-specific investments are correlated not only with fewer suppliers, but also with a larger fraction of repeated relationships; and (c) under conditions of greater asset specificity, engaging a smaller number of suppliers is even more strongly associated with repeated relationships. Second, the need to optimize fit between firm needs and supplier skills is associated with the use of a greater number of suppliers. As firms’ needs become more idiosyncratic and diverse, they engage more suppliers. Third, different types of IT have different implications for supply chain structure. Investments in technologies that reduce search costs and transaction costs are correlated with using more suppliers, while use of vendor-specific IT is associated with fewer suppliers. Our work extends the literature on the role of IT in supply chain governance by integrating multiple lines of theory in a repeated setting and using new large scale empirical evidence to test predictions about how IT use relates to both the number of suppliers and repetition in supply chain relationships.