Re: 2014 ZA Q3

[William Toh]

The question is on control costs, so that's what you should focus on.  The 1st 3 points of your framework is needlessly long.

This is my suggested abstract intro to ensure you focus on answering the question.

Control costs are incurred by agents after making the exchange to ensure that all parties adhere to the terms stated in the contract.

Obviously, this requires all parties to have access to information surrounding the execution of the contract, such that each party can freely inspect the other, and seek recourse should any deviations be found.  Unfortunately, as agents are economic humans, there is a risk that the recalcitrant party would take advantage of information asymmetry to act opportunistically in a manner detrimental to the other party.

In online B2C transactions, companies face enormous control costs due to the faceless and global nature of the transactions.  Most of these control costs relate to the operational aspect of their e-commerce sites, which can potentially be hacked by opportunistic agents in many ways.  The companies must also protect themselves from the opportunistic behavior of their customers, who have little reason to want to act fairly since they might only be buying from the companies just once.  This is unlike that of B2B transactions where buyers seek a long term relationship with their suppliers and hence are more accountable for their actions.  It is therefore necessary that B2C companies build features in their system to reduce the chance of fraud and non-payment.

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On Fri, Mar 30, 2018 at 10:33 PM, KEK FONG YEE (GUO FANGYU) <fygfk...@mymail.sim.edu.sg> wrote:

Dear Sir

i feel that this essay is very hard to expand. could you give me some pointers on this question ?

"Discuss the main control costs faced by companies involved in B2c transactions. Provide examples of how these costs can be reduced."

 

 

1.Link of B2C transactions and transaction costs

• a B2C ebiz is a company that does most of its transactions on the internet.
• Involves two stakeholders who are value maximising and opportunistic economic agents- the biz and the consumer
• For B2C to succeed, ICT need to reduce the frictions that prevent the transactions from happening -the transaction costs
• Although ICT have the ability to reduce search, contract and control cost,  it can only happen under specific conditions where ict help to mitigate the factors affecting transaction costs- BR, U,OB
• If not, ICT may increase TC which eventuallly leads to the failure of  b2c
• Using ICT itself is a TC, for the biz to be successful, need to reduce more tc that it incurs

 

2. What are transaction costs in relation to B2C transactions

• transaction costs are investments incurred by economic agents to reduce their uncertainty and BR surrounding the terms of economic exchange.
• Search costs of B2C: look for buyer and sellers to transact with.
• Contract costs of B2C: buyer-evaluation of quality of product,reputation of sellers
• Control costs of B2C: buyer- monitor costs of delivery of goods,customer service,seller-whether payments are really made before seller sends out goods

 

 

3.How ICT can be used to reduce transaction costs

• Malone effects of ICT

• Communications effect: reduce search and control costs
• Brokerage effect: helps matching so reduce search and contract costs
• Integration effect: reduce coordination costs within company so businesses can be tightly coupled, increase transparency and trust so control costs reduce

 

3.How control costs can be reduced in B2C transactions

• how to reduce control costs:

•  makes use of payment intermediaries to monitor on behalf of the biz and customers eg paypal,credit card companies
• Can monitor location of goods being sent to buyer easily so reduce transaction costs eg tracking of parcels online
• Do not have to monitor as much when the B2C made use of identity intermediaries eg verisgn , so customers know they are dealing with verified websites and not scam, so will not monitor as much.

 

Questions i do not understand :

1.  can verisign reduce contracting costs since buyers may take into account of whether an online shop is verified before purchasing?
2. What are the contract costs of sellers?