Unintended Transaction Costs on the Web

Other transaction costs on the web which have recently received much attention have to do with unintended operations such as click fraud and e-mail spams. To what extent do the costs of handling such unintended or undesired behavior affect any overal savings in marketing, search or communications costs afforded on the web? What potential new schemes can inoculate transactions against costs related to spam and click fraud on the Internet? Or will we have to look for another transformation of far broader impact on transactions than what Internet has brought so far?
Comments:

Jellyfish is addressing this by having the advertiser pay only if the customer buys something. The customer has an incentive to use Jellyfish because (in almost all) cases they credit 1% - 30% of the purchase price back to the customer.

Posted by Mike Gerdts on November 27, 2006 at 01:41 AM PST #

The trouble with the kind of mechanism offered by Jellyfish (as described by Mike in his comment) is that it typically makes a market more complicated and less efficient. So there is a hidden transaction cost somewhere in the system, regardless of who ultimately bears this cost.

Posted by RichardVeryard on November 27, 2006 at 08:03 PM PST #

Is there any reason to suppose that transaction costs will continue on a downward trend? Communication technologies have clearly affected transaction costs, and for a while there was a widespread belief that the Internet would deliver near-zero transaction costs. But a lot of the innovations in this area have turned out to be not economically viable, or to have hidden side effects (as you point out). There are undoubtedly opportunities for further innovation in this area, but we should probably be a little sceptical about the potential benefits.

Posted by RichardVeryard on November 27, 2006 at 08:19 PM PST #

Hi Richard - I gree with your analysis above, i.e. with both posts. The Jellyfish model introduces more complexities. It purportedly "protects" the advertisers but it complicates the transaction in other ways which do increase effective transaction costs not to mention the fact that it leaves little on the table to the bearer of advertisement content. (In transaction cost economics we need to worry about whether the deal is viable. It cannot be when it doesn't leave something on the table for everyone.)

I also agree with the second post, i.e. the existence of thresholds in costs that may not be passed in various transactions and the fact that all "cost-reducing" web technologies have side effects that increase costs.

For example, in supply chain management, researchers model the effect of information flow up the supply chain. If demand information (at each stage down the stream) is available thoughout the upstream stages, we still have some bullwhip effect, i.e. we still have some inherent fluctuations that we need to deal with in terms of inventory costs, etc. So, even when perfect information becomes available, there are inherent physical problems that need to be dealt with, besides the obvious but often ignored fact that the "perfect" information comes at a significant cost.

The most efficient scheme is still the physical market with some safeguards depending on the value of the transaction. If adequate safeguard cannot be put in place, you bring the transaction into the firm, i.e. you make the classical build (or make) vs. buy decision.

Posted by M. Mortazavi on November 28, 2006 at 01:26 PM PST #

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