We argue that the openness of an industry's B2B e-commerce systems will have a direct effect on the structure of downstream industry activities. Industries where the B2B e-commerce systems are largely open to participation should experience increased heterogeneity and competition in downstream industry activities. Industries where the B2B e-commerce systems are largely closed should experience increased homogeneity and decreased competition in downstream industry activities. We further argue that the openness of the B2B systems will depend on the type of B2B systems that develops within a specific industry. Correspondingly, much attention should be given to the type of B2B e-commerce systems that emerge.
Business to business exchange generally refers to any business transaction occurring between two separate business entities. This includes the exchange of both products and service. Examples might include the selling of raw material inputs from one firm to another, the sale of capital equipment, the purchasing of commercial insurance or the contracting of one firm with another for the procurement of accounting services. Electronically based B2B exchange, more commonly and henceforth referred to as B2B e-commerce, refers to any type of B2B exchange that is primarily facilitated through the use of an electronic media.
The primary economic advantage of B2B e-commerce is perhaps best understood through the use of a value-chain analysis. The value chain model analyzes the production of a particular product or service as a series of "value-added" activities. In addition to the primary "value-added" activities associated with any production process, there also exists a variety of non-value-added activities or "support" services necessary for the operation of the primary value-added activities. For example, primary activities associated with the production of an automobile might involves activities such as the production of material inputs and the assembly of inputs into a final product. Support activities might include the development and use of human resource systems designed to manage the labor force and the development and use of procurement systems employed to facilitate the purchase and distribution of material inputs.
The primary economic advantage of B2B e-commerce is increased efficiency in the area of non-value-added activities. More specifically, B2B e-commerce streamlines the procurement process adding efficiency to this aspect of the overall production process. As suggested by Lucking-Reiley and Spulber (2000), B2B e-commerce "aims to reduce the cost of procurement before, during and after the transaction." B2B e-commerce lowers the cost of procurement before the transaction by reducing the searching costs associated with procuring inputs and by increasing the ease of price setting and product comparison. B2B e-commerce also reduces the cost of procurement during the transaction by reducing the level of interpersonal communication needed to facilitate the completion of the transaction. Finally, it can reduce the costs associated with monitoring contractual performance and confirming product or service delivery.