《电子商务 E-business》阅读文献_E-Business Strategies and Internet Business Models

Organizational Dynamics, Vol 33, No 2, pp. 161-173, 2004 ISSN 0090-2616/S-see frontmatter G 2004 Elsevier Inc. All rights reserved doi:10.1016/ jordyn200401004 ganIzational-d E-Business Strategies and Internet Business models How the internet Adds value G.T. LUMPKIN GREGORY DESS he Internet continues to grow and evolve the Net represents something qual as a vital resource with which companies tatively new-an unprecedented can upgrade their capabilities and grow their powerful, universal communica businesses. Shop. org and Forrester Research tions medium. Far surpassing radio at, at its growth and television, this medium is digi- retail sales in the United States will top the tal, infinitely richer, and interactive $100 billion mark in 2004 which represents 4.5 Mobile comput percent of total retail sales. Business-to-busi- broadband access, wi ness(B2B)e-commerce is expected to grow works, and computing pe ower worldwide to $4.3 trillion by 2005 according to embedded in everything from refrig International Data Corp(IDC). The phenom- erators to automobiles are conver- success of youn g companies such ging into a global network that will Bay Google, and amazon are also indicative nable people to use the Net just of the Internets potential about anywhere and anytime The impact of the information technology revolution, however, goes beyond the Inter These technology-driven initiatives-the net. At a more basic level, it is the shift from Internet, wireless communications, and other analog to digital technologies that is respon digital technologies-are having a significant sible for so many new information technology impact on the economy. They have done so by (IT) capabilities. Analog was once the primary changing the ways businesses interact with technology for conveying information such as each other and with consumers This has not music recordings, voice communications, and only created an environment in which busi television signals. Many technologies have nesses must perform at a higher level-faster, made the switch from analog to digital- cheaper, smarter-but also it has created phones, Photographs, television signals, and many new business opportunities ven so, many firms are still struggling tion is here to stay. As a result, digital tech with the basic issue of how to use the Internet nology capabilities which, in essence, make igital technologies for their best advan- the Internet possible, are altering the way tage. Despite the visible and noteworthy suc business is conducted. According to digital esses such as eBay and Google, other Internet economy visionary Don Tapscott companies continue to struggle including here-to-stay giants such as Time Warner The Net is much more than just The weak economy is partially to blame another technology developmen for faltering Internet businesses. However,a

E-Business Strategies and Internet Business Models: How the Internet Adds Value G.T. LUMPKIN GREGORY G. DESS T he Internet continues to grow and evolve as a vital resource with which companies can upgrade their capabilities and grow their businesses. Shop.org and Forrester Research predict that, at its present growth rate, on-line retail sales in the United States will top the $100 billion mark in 2004 which represents 4.5 percent of total retail sales. Business-to-busi￾ness (B2B) e-commerce is expected to grow worldwide to $4.3 trillion by 2005 according to International Data Corp (IDC). The phenom￾enal success of young companies such as eBay, Google, and Amazon are also indicative of the Internet’s potential. The impact of the information technology revolution, however, goes beyond the Inter￾net. At a more basic level, it is the shift from analog to digital technologies that is respon￾sible for so many new information technology (IT) capabilities. Analog was once the primary technology for conveying information such as music recordings, voice communications, and television signals. Many technologies have made the switch from analog to digital— phones, photographs, television signals, and even books—and the trend suggests digitiza￾tion is here to stay. As a result, digital tech￾nology capabilities which, in essence, make the Internet possible, are altering the way business is conducted. According to digital economy visionary Don Tapscott: The Net is much more than just another technology development; the Net represents something quali￾tatively new—an unprecedented, powerful, universal communica￾tions medium. Far surpassing radio and television, this medium is digi￾tal, infinitely richer, and interactive ... Mobile computing devices, broadband access, wireless net￾works, and computing power embedded in everything from refrig￾erators to automobiles are conver￾ging into a global network that will enable people to use the Net just about anywhere and anytime. These technology-driven initiatives—the Internet, wireless communications, and other digital technologies—are having a significant impact on the economy. They have done so by changing the ways businesses interact with each other and with consumers. This has not only created an environment in which busi￾nesses must perform at a higher level—faster, cheaper, smarter—but also it has created many new business opportunities. Even so, many firms are still struggling with the basic issue of how to use the Internet and digital technologies for their best advan￾tage. Despite the visible and noteworthy suc￾cesses such as eBay and Google, other Internet companies continue to struggle including ‘‘here-to-stay’’ giants such as Time Warner. The weak economy is partially to blame for faltering Internet businesses. However, a Organizational Dynamics, Vol. 33, No. 2, pp. 161–173, 2004 ISSN 0090-2616/$ – see frontmatter
2004 Elsevier Inc. All rights reserved. doi:10.1016/j.orgdyn.2004.01.004 www.organizational-dynamics.com 161

more fundamental reason is that companies conduct business on-line and use digital are still not clear how the Internet adds value technologies to streamline operations, the In this article we look at how nternet is helping them develop new value are leveraging the unique features of digital propositions. Fig. 1 illustrates four related technology to create competitive advantages value-adding activities that are being revo- Two aspects of this approach stand out. First, lutionized by the Internet-search, evalua- there are several strategies that Internet- tion, problem-solving, and transaction. In based businesses can use to improve their this section, we address how companies value propositions. These include four Inter- can use these capabilities to add value and net-specific activities that are providing firms create competitive advantages with new capabilities-search, evaluation problem-solving and transaction. These value-adding activities are enhanced further Search Activities by managing three different types of Internet Search refers to the process of gathering content--customer feedback, expertise, and information and identifying purchase entertainment programming. Second, these options. The Internet has enhanced both value-adding strategies are best understood the speed of information gathering and the in the context of business models that are breadth of information that can be accessed specific to the Internet environment. Thus, This enhanced search capability is one of the we will consider seven internet business key reasons the Internet has lowered switch- models that have emerged and proven suc ing cost--by decreasing the cost of search cessful, and outline how value-adding activ. These efficiency gains have greatly benefited ities and content are best used in the context buyers. Suppliers also have benefited. Small of each of the internet business models suppliers that had difficulty getting noticed can more easily be found. Large suppliers can publish thousands of pages of informa- INTERNET ACTIVITIES THAT tion for a fraction of the cost that hard-copr ADD VALUE catalogs once required. Additionally, on-line search engines have accelerated the search In his article, Strategy and the Internet, process to incredible speeds Michael Porter has emphasized that Internet Consider the example of Google,a technology becomes strategically significant search engine developed as a project by only when its practical application creates two graduate students, which became the new value. How w are firms using the Internet number-one search service in just four years to add value? By allowing companies to Why? Because it is capable of incredible FIGURE1 NTERNET ACTIVITIES THAT ADD VALUE Product-Related Evaluation Transaction Service-Related Problem-Solving 162 ORGANIZATIONAL DYNAMICS

more fundamental reason is that companies are still not clear how the Internet adds value. In this article we look at how companies are leveraging the unique features of digital technology to create competitive advantages. Two aspects of this approach stand out. First, there are several strategies that Internet￾based businesses can use to improve their value propositions. These include four Inter￾net-specific activities that are providing firms with new capabilities—search, evaluation, problem-solving and transaction. These value-adding activities are enhanced further by managing three different types of Internet content—customer feedback, expertise, and entertainment programming. Second, these value-adding strategies are best understood in the context of business models that are specific to the Internet environment. Thus, we will consider seven Internet business models that have emerged and proven suc￾cessful, and outline how value-adding activ￾ities and content are best used in the context of each of the Internet business models. INTERNET ACTIVITIES THAT ADD VALUE In his article, ‘‘Strategy and the Internet,’’ Michael Porter has emphasized that Internet technology becomes strategically significant only when its practical application creates new value. How are firms using the Internet to add value? By allowing companies to conduct business on-line and use digital technologies to streamline operations, the Internet is helping them develop new value propositions. Fig. 1 illustrates four related value-adding activities that are being revo￾lutionized by the Internet—search, evalua￾tion, problem-solving, and transaction. In this section, we address how companies can use these capabilities to add value and create competitive advantages. Search Activities Search refers to the process of gathering information and identifying purchase options. The Internet has enhanced both the speed of information gathering and the breadth of information that can be accessed. This enhanced search capability is one of the key reasons the Internet has lowered switch￾ing cost—by decreasing the cost of search. These efficiency gains have greatly benefited buyers. Suppliers also have benefited. Small suppliers that had difficulty getting noticed can more easily be found. Large suppliers can publish thousands of pages of informa￾tion for a fraction of the cost that hard-copy catalogs once required. Additionally, on-line search engines have accelerated the search process to incredible speeds. Consider the example of Google, a search engine developed as a project by two graduate students, which became the number-one search service in just four years. Why? Because it is capable of incredible FIGURE 1 INTERNET ACTIVITIES THAT ADD VALUE Evaluation Problem-Solving Search Transaction Service-Related Product-Related 162 ORGANIZATIONAL DYNAMICS

things: Using 10,000 networked compt Enhanced evaluation is a capability that it searches 3 billion Web pages in an average adds value to the process of selling products of 500 milliseconds. To do the same search or manufactured goods. Many Internet busi manually by thumbing through nesses, according to digital business experts pages at the rate of 1 minute per page, would Ming Zeng and Werner Reinartz, could take 5, 707 years. This ability has made Goo- improve their performance by making a gle an essential tool for many businesses. As stronger effort to help buyers evaluate pur a result, Google has built a powerful adver- chases. Even so, only certain types of products tising business. Mark Kini, who runs a small can be evaluated on-line. products such as limousine service in Boston, spends 80 per- CDs that appeal primarily to the sense of cent of his advertising budget on Google and sound sell well on the Internet. But products other search engines. " Its how we survive that appeal to multiple senses are harder to the recession, says Kini evaluate on-line. This explains why products Thus, enhanced Internet search capabil such as furniture and fashion have never been ities make it possible for firms to find critical strong on-line sellers. It's one thing to look at a information much more rapidly and have leather sofa, but to be able to sit in it and touch greatly increased the possibility that one firm and smell the leather on-line is impossible can be located by another firm or by custo- mers wishing to conduct business with it Problem-Solving Activities Evaluation activities Problem-solving refers to the process of iden tifying problems or needs and generating Evaluation refers to the process of consider- ideas and action plans to address those needs ing alternatives and comparing the costs and Whereas evaluation is primarily product benefits of various options. On-line services related, problem-solving is typically used in that facilitate comparative shopping, provide he context of services. Customers usually product reviews, and catalogue customer have unique problems; such problems, there- evaluations of performance have made the fore, are typically handled one at a time. For Internet a valuable resource. For example, example, on-line travel services such as Tra- bizrate. com offers extensive product ratings velocity help customers select from many that can help evaluate products. Sites such as ns to form a u travel packa CNET that provide comparative pricing have problem-solving often involves helped lower prices even for quality pro- providing answers immediately(compared to ducts that have traditionally maintained pre- he creation of a new product). Firms in indus- mium prices. Opinion-based sites such as tries such as medicine, law, and engineering epinions.comandplanetfeedback.compro-areusingtheInternetanddigitaltechnologies vide reports of consumer experiences with to deliver many new solutions. Some of these various vendors are quite remarkable. Exhibit 1 describes how Exhibit 1 Eli Lilly: Virtually Seeking Solutions-Worldwide In 2001, pharmaceutical giant Eli Lilly was anticipating a big drop in sales. That was the year the patent expired on its blockbuster drug Prozac, which accounted for 34 percent of Lilly's annual sales. But rather than launch a new drug, Lilly launched an Internet business--InnoCentive, LLC InnoCentive, as the name implies, provides incentives for innovation. It does so by providing a platform for scientists from around the world to work in virtual communities to solve complex problems. The effort does not just benefit Lilly, but provides a virtual, open source research and development(R&D)organization that any member company can use

things: Using 10,000 networked computers, it searches 3 billion Web pages in an average of 500 milliseconds. To do the same search manually, by thumbing through 3 billion pages at the rate of 1 minute per page, would take 5,707 years. This ability has made Goo￾gle an essential tool for many businesses. As a result, Google has built a powerful adver￾tising business. Mark Kini, who runs a small limousine service in Boston, spends 80 per￾cent of his advertising budget on Google and other search engines. ‘‘It’s how we survive the recession,’’ says Kini. Thus, enhanced Internet search capabil￾ities make it possible for firms to find critical information much more rapidly and have greatly increased the possibility that one firm can be located by another firm or by custo￾mers wishing to conduct business with it. Evaluation Activities Evaluation refers to the process of consider￾ing alternatives and comparing the costs and benefits of various options. On-line services that facilitate comparative shopping, provide product reviews, and catalogue customer evaluations of performance have made the Internet a valuable resource. For example, bizrate.com offers extensive product ratings that can help evaluate products. Sites such as CNET that provide comparative pricing have helped lower prices even for quality pro￾ducts that have traditionally maintained pre￾mium prices. Opinion-based sites such as epinions.com and planetfeedback.com pro￾vide reports of consumer experiences with various vendors. Enhanced evaluation is a capability that adds value to the process of selling products or manufactured goods. Many Internet busi￾nesses, according to digital business experts Ming Zeng and Werner Reinartz, could improve their performance by making a stronger effort to help buyers evaluate pur￾chases. Even so, only certain types of products can be evaluated on-line. Products such as CDs that appeal primarily to the sense of sound sell well on the Internet. But products that appeal to multiple senses are harder to evaluate on-line. This explains why products such as furniture and fashion have never been strong on-line sellers. It’s one thing to look at a leather sofa, but to be able to sit in it and touch and smell the leather on-line is impossible. Problem-Solving Activities Problem-solving refers to the process of iden￾tifying problems or needs and generating ideas and action plans to address those needs. Whereas evaluation is primarily product￾related, problem-solving is typically used in the context of services. Customers usually have unique problems; such problems, there￾fore, are typically handled one at a time. For example, on-line travel services such as Tra￾velocity help customers select from many options to form a unique travel package. Furthermore, problem-solving often involves providing answers immediately (compared to the creation of a new product). Firms in indus￾tries such as medicine, law, and engineering are using the Internet and digital technologies to deliver many new solutions. Some of these are quite remarkable. Exhibit 1 describes how Exhibit 1 Eli Lilly: Virtually Seeking Solutions—Worldwide In 2001, pharmaceutical giant Eli Lilly was anticipating a big drop in sales. That was the year the patent expired on its blockbuster drug Prozac, which accounted for 34 percent of Lilly’s annual sales. But rather than launch a new drug, Lilly launched an Internet business—InnoCentive, LLC. InnoCentive, as the name implies, provides incentives for innovation. It does so by providing a platform for scientists from around the world to work in virtual communities to solve complex problems. The effort does not just benefit Lilly, but provides a virtual, open source research and development (R&D) organization that any member company can use. 163

Here's how it works: Drug companies, called"Seekers, "put up"Wanted"posters describing problems that need addressing Bounty-hunting scientists, labeled"Solvers, sign confidentiality agreements that gain them admission to a secure project room where they can access data and product specifications related to the problem. If they solve the problem, they get a reward-around $25,$30,000 depending on the problem According to InnoCentive president and chief executive officer(CEO)Darren J. Carroll, what Lilly has done is unusual for two reasons. First, by creating a global community of scientists, We re punching a hole in the side of the laboratory and exposing mission-critical problems to the outside world, " says Carroll, "It's using the Net to communicate, collaborate, and innovate. "Second, it makes it possible for scientists to essentially become freelancers. According to Carroll, "Free agency has never been an option in the hard sciences-until now Eli Lilly &z Company has used the Internet to the cost structures of certain industries, is a form a virtual platform where top scientists key feature of the digital economy. Applica- help drug companies solve complex pro- tions of Internet-based technologies have blems already had an enormous impact Giga Infor- Many products involve both a service mation Group, Inc. estimates that the cost and a product component; therefore, both savings from business use of e-commerce problem solving and evaluation may be will reach $1.25 trillion by the mid-2000 needed. Dell Computers Web site is an There are numerous examples of how the example of a site that has combined the Internet is both lowering the cost of and benefits of both. By creating a Web site that speeding up the transaction process. Auc- allow for customization of individual com- tions of various sorts from raw materials puters, they address the unique concerns of used in manufacturing to collectibles sold customers"one computer at a time. But the on eBay, facilitate the process of arriving at site also features a strong evaluative compo- mutually agreed-on prices. Services such as nent because it allows users to compare the Pa ird-party intermedi costs and features of various options. Shop- that facilitates transactions between parties pers can even compare their customized who have never met. Amazons One-Click selection to refurbished Dell computers that technology, which allows for very rapid pur are available at a substantially lower cost hases, and Amazons overall superiority in managing order fulfillment has made its Transaction activities transactions process rapid and reliable. In fact, Amazon's success today can be attrib. Transaction refers to the process of complet uted to a large extent to the fact they have ing the sale, including negotiating and agree- sold this transaction capability to other com- ing contractually, making payments, and panies such as Target Corp. Toys R"Us taking delivery. Numerous types of Inter- Inc, and Borders books Music net-enabled activities have contributed These four factors are primary ways lowering that organizations go about adding value costs. Managing costs, and even changing Exhibit 2 describes several examples of how Exhibit 2 Value Adding in the Auto Industry The auto industry jumped on the Internet bandwagon in a big way. One of the early successes was Autobytel, and many on-line auto sales Web sites quickly followed. The majority of them have now fizzled away. The big auto makers also made huge investments in the Internet. Ford was especially aggressive and 164 ORGANIZATIONAL DYNAMICS

Eli Lilly & Company has used the Internet to form a virtual platform where top scientists help drug companies solve complex pro￾blems. Many products involve both a service and a product component; therefore, both problem solving and evaluation may be needed. Dell Computer’s Web site is an example of a site that has combined the benefits of both. By creating a Web site that allow for customization of individual com￾puters, they address the unique concerns of customers ‘‘one computer at a time.’’ But the site also features a strong evaluative compo￾nent because it allows users to compare the costs and features of various options. Shop￾pers can even compare their customized selection to refurbished Dell computers that are available at a substantially lower cost. Transaction Activities Transaction refers to the process of complet￾ing the sale, including negotiating and agree￾ing contractually, making payments, and taking delivery. Numerous types of Inter￾net-enabled activities have contributed to lowering this aspect of overall transaction costs. Managing costs, and even changing the cost structures of certain industries, is a key feature of the digital economy. Applica￾tions of Internet-based technologies have already had an enormous impact. Giga Infor￾mation Group, Inc. estimates that the cost savings from business use of e-commerce will reach $1.25 trillion by the mid-2000s. There are numerous examples of how the Internet is both lowering the cost of and speeding up the transaction process. Auc￾tions of various sorts, from raw materials used in manufacturing to collectibles sold on eBay, facilitate the process of arriving at mutually agreed-on prices. Services such as Paypal provide a third-party intermediary that facilitates transactions between parties who have never met. Amazon’s One-Click technology, which allows for very rapid pur￾chases, and Amazon’s overall superiority in managing order fulfillment has made its transactions process rapid and reliable. In fact, Amazon’s success today can be attrib￾uted to a large extent to the fact they have sold this transaction capability to other com￾panies such as Target Corp., Toys ‘‘R’’ Us Inc., and Borders Books & Music. These four factors are primary ways that organizations go about adding value. Exhibit 2 describes several examples of how Exhibit 2 Value Adding in the Auto Industry The auto industry jumped on the Internet bandwagon in a big way. One of the early successes was Autobytel, and many on-line auto sales Web sites quickly followed. The majority of them have now fizzled away. The big auto makers also made huge investments in the Internet. Ford was especially aggressive and Here’s how it works: Drug companies, called ‘‘Seekers,’’ put up ‘‘Wanted’’ posters describing problems that need addressing. Bounty-hunting scientists, labeled ‘‘Solvers,’’ sign confidentiality agreements that gain them admission to a secure project room where they can access data and product specifications related to the problem. If they solve the problem, they get a reward—around $25,000–$30,000 depending on the problem. According to InnoCentive president and chief executive officer (CEO) Darren J. Carroll, what Lilly has done is unusual for two reasons. First, by creating a global community of scientists, ‘‘We’re punching a hole in the side of the laboratory and exposing mission-critical problems to the outside world,’’ says Carroll, ‘‘It’s using the Net to communicate, collaborate, and innovate.’’ Second, it makes it possible for scientists to essentially become freelancers. According to Carroll, ‘‘Free agency has never been an option in the hard sciences—until now.’’ 164 ORGANIZATIONAL DYNAMICS

launched several Web sites--Trilogy. com, CarOrder. com, FordDirect com--most of which never amounted to anything. But that was in the late 1990s, when it was still unclear how best to use the Internet. Now the automakers-and the auto-buying public--have found ways to use the Internet profitably. Here are a few Search Ebay, the on-line auction giant that makes searching for products of all sorts fast and simple, has become a player in the used car business. Beginning with a few private individuals, the auto auction business took off unexpectedly, so the company formed eBay Motors, which contributed about $100 million to eBay's total revenue of $1.2 billion in 2002. eBay's technology speeds the process of on-line search, and buyers who may have been reluctant to shop for cars on-line are comforted by eBays reputation. eBay and other on-line auto-sales sites make searching for insurance and auto financing easier as well Problem Solving To help its dealers manage inventories more effectively, General Motors Corp. developed SmartAuction. For vehicles that are coming off lease, SmartAuction notifies customers to bring in cars for an inspection before the lease expires. The condition of the car is logged into the system and sent to GM dealers who use it to purchase cars electronically. The system helps dealers find cars that fit their target audience, manages the auto-titling process, and shortens the time cars are carried in inventory Evaluation In the early days of the Internet, most thought that cars would never sell on-line because customers like to kick the tires and take a test drive. This is often still true. But customers who go for a test drive, and have also already researched the car on-line, usually save money when they buy. Economists researching this phenomenon have labeled it the "information effect"-auto shoppers who first gather information on-line are better able to evaluate their purchase Transaction Auto referral services such as CarsDirect have streamlined the transaction process by brokering purchases between dealers and consumers. Through these companies, both new and used cars can be purchased on-line, sight unseen. One shopper, who bought a used car on-line, flew to Fort Worth Texas to pick it up, and drove it 18 hours back home to Ohio said, " in retrospect, I had more information about this vehicle than if I had gone onto a dealer's lot and started haggling over price. " On-line auto shoppers typically save money due to the"contract effect" which occurs because third-party auto referral services monitor the quality of the information provided by dealers and facilitate the transaction. the automobile industry and car buyers have detailed and attractive content. But the used each of these four activities to benefit expense did not generate sales. Content only heir own value-adding efforts adds value if it contributes to the overall valuepropositionAsaresultGarden.com Content as a source of failed in early 2001(but the name is still being Competitive Advantage used by the burp mpany, a 125-year-old supplier of garden products who boug There are other factors that can be important rights to the name) sources of competitive advantage. One of the Three types of content can improve the most important of these is content. The Inter value proposition of a Web site--customer net makes it possible to capture vast amounts feedback, expertise, and entertainment pro- of content at a very low cost Rel.Com, example, a provider of recreational equip- Customer feedback: Buyers often trust ment and apparel, has over 78,000 items what other buyers say more than a com described on its 45,000-page Web site. But pany's promises. One type of content that firms have not always managed content in can enhance a Web site is customer testimo- ways that add value. Garden. com, a site that nials. Remember the leather sofa in the exam- started strongly in 1999 and raised enormous ple above? Even though individuals cant venture capital, spent millions on creating feel and smell a sofa on-line, the unbiased

the automobile industry and car buyers have used each of these four activities to benefit their own value-adding efforts. Content as a Source of Competitive Advantage There are other factors that can be important sources of competitive advantage. One of the most important of these is content. The Inter￾net makes it possible to capture vast amounts of content at a very low cost. REI.com, for example, a provider of recreational equip￾ment and apparel, has over 78,000 items described on its 45,000-page Web site. But firms have not always managed content in ways that add value. Garden.com, a site that started strongly in 1999 and raised enormous venture capital, spent millions on creating detailed and attractive content. But the expense did not generate sales. Content only adds value if it contributes to the overall value proposition. As a result Garden.com failed in early 2001 (but the name is still being used by the Burpee company, a 125-year-old supplier of garden products who bought rights to the name). Three types of content can improve the value proposition of a Web site—customer feedback, expertise, and entertainment pro￾gramming:
Customer feedback: Buyers often trust what other buyers say more than a com￾pany’s promises. One type of content that can enhance a Web site is customer testimo￾nials. Remember the leather sofa in the exam￾ple above? Even though individuals can’t feel and smell a sofa on-line, the unbiased launched several Web sites—Trilogy.com, CarOrder.com, FordDirect.com—most of which never amounted to anything. But that was in the late 1990s, when it was still unclear how best to use the Internet. Now the automakers—and the auto-buying public—have found ways to use the Internet profitably. Here are a few examples: Search Ebay, the on-line auction giant that makes searching for products of all sorts fast and simple, has become a player in the used car business. Beginning with a few private individuals, the auto auction business took off unexpectedly, so the company formed eBay Motors, which contributed about $100 million to eBay’s total revenue of $1.2 billion in 2002. eBay’s technology speeds the process of on-line search, and buyers who may have been reluctant to shop for cars on-line are comforted by eBay’s reputation. eBay and other on-line auto-sales sites make searching for insurance and auto financing easier as well. Problem Solving To help its dealers manage inventories more effectively, General Motors Corp. developed SmartAuction. For vehicles that are coming off lease, SmartAuction notifies customers to bring in cars for an inspection before the lease expires. The condition of the car is logged into the system and sent to GM dealers who use it to purchase cars electronically. The system helps dealers find cars that fit their target audience, manages the auto-titling process, and shortens the time cars are carried in inventory. Evaluation In the early days of the Internet, most thought that cars would never sell on-line because customers like to kick the tires and take a test drive. This is often still true. But customers who go for a test drive, and have also already researched the car on-line, usually save money when they buy. Economists researching this phenomenon have labeled it the ‘‘information effect’’—auto shoppers who first gather information on-line are better able to evaluate their purchase. Transaction Auto referral services such as CarsDirect have streamlined the transaction process by brokering purchases between dealers and consumers. Through these companies, both new and used cars can be purchased on-line, sight unseen. One shopper, who bought a used car on-line, flew to Fort Worth, Texas to pick it up, and drove it 18 hours back home to Ohio said, ‘‘in retrospect, I had more information about this vehicle than if I had gone onto a dealer’s lot and started haggling over price.’’ On-line auto shoppers typically save money due to the ‘‘contract effect’’ which occurs because third-party auto referral services monitor the quality of the information provided by dealers and facilitate the transaction. 165