The Impact of E-Commerce on Competition in the Retail Brokerage Industry

Abstract

This paper analyzes the impact of e-commerce on markets where established firms face competition from Internet-based entrants with focused offerings. In particular, we study the retail brokerage sector where the growth of online brokerages and the availability of alternate sources of information and research services have challenged the dominance of traditional brokerages. We develop a stylized game-theoretic model to analyze the impact of competition between an incumbent fullservice brokerage firm with a bundled offering of research services and trade execution and an online entrant offering just trade execution. We find that as consumers' willingness-to-pay for research declines, the incumbent finds it optimal to unbundle its offering when competing with the online entrant. We also find that the online entrant chooses a lower quality of trade execution when faced with direct competition from the incumbent's unbundled offering. The analytical model motivates a unique field experiment placing actual simultaneous trades with traditional full-service and online brokers, to compare order handling practices and the quality of trade execution. In keeping with our analytical results, our empirical findings show a significant difference in the quality of execution between online brokerages and their full-service counterparts. We discuss the relevance of our findings for quality differentiation, price convergence and profit decline in a variety of markets where traditional incumbents are faced with changes in the competitive landscape as a result of e-commerce.

Stakeholder Participation in Investigating the Impact of E-Commerce Upon the Value Chain

“…Research has identified new organisational and market forms, and new opportunities and risks (Timmers 1999;Turban, Lee et al 1999;Berryman, Harrington et al 2000), as well as suggesting industries in which e-commerce may have a large impact, eg. financial markets (Bakos et al 2000), tourism and leisure (Chircu and Kauffman, 2000;McCubbrey, 1999), or car dealerships (Watson and McKeown, 1999;Marshall, Sor et al 2000). Notably, these are mainly the services industries involving a concentration of information processing activities, which may be automated, decentralised, open to other potential improvements, or are subject to competition from Internet-only companies, the so called 'cybermediaries' (Jin and Robey 1999).…”

Quality Uncertainty and the Performance of Online Sponsored Search Markets: An Empirical Investigation

“…In a study of financial brokerages, Bakos et al (2005) find that investors using online brokerages can be burdened with hidden costs stemming from lower execution quality, compared to traditional brokerages. In a study comparing stamp auctions in online and offline settings, Dewan and Hsu (2004) find that the lack of information regarding quality in online auctions leads to adverse selection and lower prices compared to traditional auctions.…”

Effect of Network Relations on the Adoption of Electronic Trading Systems

“…The degree of informational and oper ational effi ciency determines the extent to which markets are allocationally effective. Information systems can serve as intermediaries between the buyer s and the sellers in a market, creating an "electronic marketplace" that makes it less expensive for buyer s to acquire information about sellers' product offerings and prices [ 5,6]. Thus, one would expect electronic trading systems to re p lace the inefficiencies of traditional face-to-face and telephone systems among buyer s and sellers in the financial market place.…”