Uses and Consequences of Electronic Markets: An Empirical Investigation in the Aircraft Parts Industry*

Abstract

An electronic market is an interorganizational information system through which multiple buyers and sellers interact to accomplish one or more of the following market-making activities: (1) identifying potential trading partners, (2) selecting a specific partner, and (3) executing the transaction. It has been suggested that electronic markets, by lowering search costs, may lead to significantly increased price competition among sellers and hence, lower prices for buyers. Or, by allowing efficient, direct interaction between buyers and sellers, they may eliminate the role of intermediaries. Little evidence exists to support the claims. This paper empirically examines the validity of these arguments in the context of one electronic market: Inventory Locator Service (ILS) in the aircraft parts industry. Specifically, the paper addresses two questions: When do buyers use an electronic market? How do electronic markets affect each of the following: prices, inventory levels, and the role of brokers? The data show that current models do not adequately capture the complexity of electronic markets. For instance, while ILS sometimes helps buyers find a better price, in other cases it can help suppliers extract an extra premium by providing more accurate information on parts availability. ILS has also had little impact on the extent to which brokers are used, although the specific nature of the value added by brokers appears to be changing. Finally, inventory levels in the industry have been unaffected by the use of ILS. The scope of ILS is limited to the identification process only, so caution must be exercised in generalizing the findings to systems that also support selection and execution. However, the data do suggest additional variables that must be considered in understanding the uses and impacts of electronic markets, including the scope of the electronic market.

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