Choice of Transaction Channels: The Effects of Product Characteristics on Market Evolution

47 Pages Posted: 23 Nov 2016

See all articles by Sulin Ba

Sulin Ba

University of Connecticut School of Business

Jan Stallaert

University of Connecticut - School of Business

Andrew B. Whinston

University of Texas at Austin - Department of Information, Risk and Operations Management

Han Zhang

Georgia Institute of Technology

Date Written: January 1, 2005

Abstract

The capabilities of network technologies have facilitated the growth of electronic commerce. Major issues — notably, security and product quality uncertainty — still pose serious challenges to the further adoption of electronic commerce. Traditional market transactions have a long history and well-understood protections for buyers and sellers. In the electronic markets, formal and informal mechanisms such as trusted third parties (TTP) have emerged trying to ensure safe transactions. In this paper, we investigate under what conditions people will stick to the traditional market and face-to-face transactions, and under what conditions electronic transactions will be the convention of the future. Of particular interest is the role of TTPs in facilitating online transactions. Using evolutionary game theory, we present an analytical model of buyer and seller choices and examine which patterns of transactions can be sustained. We further study how the traders' adaptive behavior may influence the outcome of the market evolution. Through this analysis, we demonstrate that the market will show divergence: for commodity products, electronic transactions through TTPs will get established as the convention for market transactions when traders use historical information about other traders' past strategies. For "look and feel" products, the market evolution depends on the initial distribution of the transaction strategies in the population.

Keywords: Electronic Commerce, Electronic Markets, Evolutionarily Stable Equilibrium, Evolutionary Game Theory, Market Evolution, Product Characteristics, Stochastically Stable Equilibrium, Transaction Channel, Trusted Third Party

Suggested Citation

Ba, Sulin and Stallaert, Jan and Whinston, Andrew B. and Zhang, Han, Choice of Transaction Channels: The Effects of Product Characteristics on Market Evolution (January 1, 2005). Available at SSRN: https://ssrn.com/abstract=2853902 or http://dx.doi.org/10.2139/ssrn.2853902

Sulin Ba (Contact Author)

University of Connecticut School of Business ( email )

368 Fairfield Road
Storrs, CT 06269-2041
United States

Jan Stallaert

University of Connecticut - School of Business ( email )

368 Fairfield Road
Storrs, CT 06269-2041
United States

Andrew B. Whinston

University of Texas at Austin - Department of Information, Risk and Operations Management ( email )

CBA 5.202
Austin, TX 78712
United States
512-471-8879 (Phone)

Han Zhang

Georgia Institute of Technology ( email )

Atlanta, GA 30332
United States

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