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Electronic Commerce

Electronic Commerce


Electronic commerce (EC) consists of the buying and selling of products and services via the Internet. This can take many forms. Business to business (B2B) buying is estimated to be the most common e-commerce activity, comprising 70 percent to 80 percent of the business conducted online. Business to customer (B2C) activity makes extensive use of search engines and online tools such as easy price comparison. B2PA, or business to public administration, often involves online bidding and the downloading of documents. Public administration to public administration business is often the result of government initiatives to encourage e-commerce. PA2C, or public administration to consumers, usually involves providing e-services to the public. And finally, C2C, or consumer to consumer business, has been popularized by such auction sites as eBay.

These transactions can include online retail sales, supplier purchases, online bill paying, and Web-based auctions. Electronic commerce utilizes a variety of technologies including electronic data interchange, electronic fund transfers, credit cards, and e-mail.

The term e-commerce is often used interchangeably with e-business. The common element is the effective implementation of business activities using Internet technologies. However, e-business is the broader, more encompassing strategy and related activities. In addition to retail sales it includes vendor-partner communication, electronic procurement, customer relationship management, data-mining, and numerous other business functions.


Internet use gave a large jump toward the turn of the century, from being common in 26 percent of households in 1998 to 55 percent in 2003. Usage rates continue to climb in the United States and worldwide. This widespread use caused the riselater followed by the collapseof many Internet-based businesses, called dot-coms for their adoption of the suffix .com at the end of their names, referring to their Web site addresses. They used the three Cs method of businesscommerce, content, and connectionoffering one of the three to possible customers. Although the dot-coms formed the basis for today's e-commerce, inflated expectations and inexperience in online business transactions lead to the dot-com bubble of 2000 and 2001, when many purely online businesses imploded, costing investors millions. Some of the more famous dotcom busts include, 360Hiphop,,, and, which was featured in the documentary

After the dot-com bubble, the surviving companies dropped the coms from the end of their names and went on, some becoming successful businesses. For most companies, however, a combination of physical-based customer service and products with online components offering similar services has proven to be a more trustful method of incorporating e-commerce. In response to the dot-com bust and the continued growing interest in online trade, the Federal Trade Commission, or FTC, began to elaborate on their previous online business regulations.

Chief among the FTCs regulations is the policy that all online advertisement must tell the truth and not mislead customers. As in physical markets, all online claims must be substantiated. Disclaimers can be particularly complex on Web sites, and the FTC requires that all disclaimer information must be easily accessible and readable. In response to worries of online security issues such as account and identity theft, the FTC has also made it clear that online companies should notify customers when collecting personal data, and several Privacy Protection Acts created during the dot-com era were made to enforce that policy.


One of the first challenges involved in moving to online commerce is how to compete with other e-commerce sites. A common problem in addressing this challenge is that e-commerce is often analyzed from a technical standpoint, not a strategic or marketing perspective. E-commerce provides several technical advantages over off-line commerce. It is much more convenient for the buyer and the seller, as there is no need for face-to-face interaction and Web-based stores are open 24 hours a day. Also, e-commerce purchasing decisions can be made relatively quickly, because a vendor can present all relevant information immediately to the buyer. These factors lend themselves to a transactional approach, where e-commerce is seen as a way to reduce the costs of acquiring a customer and completing a sale.

In contrast, most successful e-commerce Web sites take a relational view of e-commerce. This perspective views an e-commerce transaction as one step among many in building a lasting relationship with the buyer. This approach requires a long-term, holistic view of the e-commerce purchasing experience, so that buyers are attracted by some unique aspect of an e-commerce Web site, and not by convenience. Since consumers can easily switch to a competing Web site, customer loyalty is the most precious asset for an e-commerce site.

While the primary focus of most Internet activity is on the business-to-business and business-to-consumer facets of e-commerce, other transaction methods are included. The success of eBay and its consumer-to-consumer portal for auction-based transactions has dramatically changed how people and companies conduct business. In addition to having a significant effect on business-to-business transactions, retailers are beginning to tap into this new and dynamic approach to commerce.


A widget is a transferrable piece of code that can move itself in and out of Web site data, collecting information or executing a particular function for a metadata program. Some of the most visible widgets are the advertisements seen on most Web sites. These are in fact pieces of code from a third-party business that are being used to communicate marketing messages.

Widgets are one of the most important tools for e-commerce, used most often for distribution of information and online promotional activities. A 2008 article by Ori Soen with TechNewWorld explores the new possibilities widgets offer companies interested in e-commerce. Not only are widget-advertisements inexpensive and relatively

easy to employ, they can be combined with present marketing efforts and visual productions with the added effect of animation, if desired.

The problem most cited with present-day widget use by e-commerce companies is that online users no longer pay attention to widget advertisement. Most business Web sites accessible today have a multitude of widgets, and the advertisements are often diluted. Like emerging problems with TV commercials, users have learned to simply stop paying attention. Soen, however, sees this as an opportunity for companies to develop more innovative marketing techniques, better online animations, and more effective branding strategies aimed at online users.

Still, e-commerce Web sites are often crowded, and Soen suggests a different focus for widget advertisement: social networks. Social applications, such as MySpace and Facebook, are another field open to creative widget use, but they also offer a more open demographic, namely, people who are more likely to be attracted to creative widgets andmore importantlyhave the ability to spread the word to their friends about advertisements that have caught their eye, giving companies two ways to promote instead of one.

Widgets serve a third purpose for e-commerce companies: the ability to collect important data concerning what advertisements are most effective to customers. When widgets are combined with analysis tools, they can be very useful gatherers of marketing information. They can judge how long a potential customer spends with the widget, and to what extent they interact with the animation. Promotional activities and marketing analysis can be effectively combined.


One of the key practices to a successful e-commerce company is personalization. Rachelle Crum's 2008 article, Personalization: Telling E-tail Customers What They Really Want, lists several ways businesses can personalize their customers' online experiences.

When customers buy products online, they often receive a short list of other items they may be interested in. This is known as recommendation, and because of the ease and access in online business, it is relatively easy for businesses to include in their e-commerce activity. Customers are much more likely to order from the company when they receive a personalized list of products.

Tailored Web pages are another important part of personalization. Many companies have designed their e-commerce businesses to use the data from returning customers to create specific Web pages advertising new products the customer may be interested in, deals that may appeal particularly to the customer, and other information tailored especially for them.


Certain devices, such as the iPhone, are becoming popular for their ability to access the Internet remotely. New technology has allowed remote Web access through phone and other handheld devices to become faster and easier to use. Some e-commerce companies have begun developing Web applications specifically for mobile Web users. This entails creating streamlined Web pages that condense information and allow customers to find what they looking for quickly and without hassle. Since these streamlined applications can be easier to navigate than normal Web pages, and can be accessed from nearly any location, some predictions say the mobile Web will become a powerful tool in the e-commerce field.

There are several different ways companies can make e-commerce more available to mobile Web users. Web designers can simply remove graphics from the Web site for mobile applications, giving users a simplified, text-only site to navigate. Style sheets can also be used, to create other versions of online stores, tailored to specific devices. Or, if a company wanted to devote more time to the project, a second Web site could be created solely for mobile Web users.


Beyond technology tools such as widgets and mobile Web devices, there are simple ways to improve Web pages and how they read and look. Slight changes in the way a Web page integrates marketing, product information, and visuals can create an enormous difference in the perceptions of customers. Most Web surfers spend a very short time inspecting online stores before moving on, and the right words or the right information, displayed correctly, can make a great difference.

As David Needle says in his 2008 article for, there are three different kinds of written cues or signposts that companies can place in their Web sites. The first type of signpost is navigation-oriented. This involves the way the online store is constructedwhere the links to products are and where they go, how far down the Web site pages scroll, and links to related sites. Bread crumbs, or easy ways for customers to return to the sites they have previously seen, are an excellent tool to give online stores structure and usability.

The second type of signpost is microcontent-related. This refers to Web site headings, URLs, and titles that organize online information. All information in the company's online store should be clear and easy to read and understand.

The third type of signpost is metadata, which is data concerning the information of the Web site itself, such as how many users have accessed it and the keywords

within the site that would come up in a search engine or analytical program.


Despite the growing number of e-commerce success stories, plenty of e-commerce Web sites do not live up to their potential. There were two primary causes of e-commerce failures during the early 2000s.

First, most Web sites offer a truncated e-commerce model, meaning that they do not give Web users the capability to complete an entire sales cycle from initial inquiry to purchase. As analyzed by Forrester Research, the consumer sales cycle has four stages. First, consumers ask questions about what they want to buy. Second, they collect and compare answers. Third, the user makes a decision about the purchase. If the purchase is made, the fourth phase is order payment and fulfillment (delivery of the goods or services). The problem is that many Web sites do not provide enough information or options for all four phases. For example, a site may provide answers about a product, but not answers to the questions that the consumer has in mind. In other cases, the consumer gets to the point where he or she wants to make a purchase, but is not given an adequate variety of payment options to place the actual order.

The second problem occurs when e-commerce efforts are not integrated properly into the corporate organization. A survey by Inter@ctiveWeek magazine found that in most companies e-commerce is treated as part of the information system (IS) staff's responsibility, and not as a business function. While sales and marketing staff generally assist in the development of e-commerce Web sites, final profit and loss responsibility rests with the IS staff. This is a major source of breakdowns in e-commerce strategy because the units that actually make products and services do not have direct responsibility for selling them on the Web. One promising trend is that more companies are beginning to decentralize the authority to create e-commerce sites to individual business units, in the same way that each unit is responsible for its part of a corporate intranet.


After studying many aspects of electronic commerce, several consulting and analytic firms created guidelines on how to implement and leverage it successfully. In particular, two organizations have developed lists of critical success factors that seem to capture the state of thinking on this topic. First is the Patricia Seybold Group, which publishes trade newsletters and provides consulting services related to using information technology in corporations. This firm identified five critical e-commerce success factors:

  1. Support customer self-service. If they so desire, Web users should be enabled to complete transactions without assistance.
  2. Nurture customer relationships. Up-front efforts should focus on increasing customer loyalty, not necessarily on maximizing sales.
  3. Streamline customer-driven processes. Firms should use Web technology to reengineer back-office processes as they are integrated with e-commerce systems.
  4. Target a market of one. Each customer should be treated as an individual market, and personalization technology should be employed to tailor all services and content to the unique needs of each customer.
  5. Build communities of interest. A company should make its e-commerce Web site a destination that customers look forward to visiting, not simply a resource people use because they have to conduct a transaction.

A quick review of two successful e-commerce sites, the bookstore site and Dell Computer's Web site, illustrate how many of these principles combine to help develop a strategic e-commerce capability., which has one of the highest sales volumes of any Web-based business, has optimized its site for the nature of its products and the preferences of its customers. The site is highly personalized; each visitor to the site, once registered, is greeted by name. The site content also is customized. Using software based on pattern recognition, compares a particular customer's purchase history to its overall record of transactions and generates a list of recommended books that seem to fit his or her interests and tastes. The company has a very integrated customer service support system, so that any customer service representative can access all data on the transactions, purchasing information, and security measures of each customer. The system also supports communications using e-mail, fax, and telephone.

Finally, helps to build a community of users through its Associates Program. Under this program, a Web site can host a hyperlink directly to the Amazon. com site. Any time that a visitor to that site buys books through, the Web site owner receives a share of the transaction revenues. This is a very inexpensive way for to extend its marketing and advertising reach across the Web.

Dell Computer also uses personalization and customization tools. For every major corporate customer, Dell creates a special Premier Page, which shows all products covered under purchasing contracts with that firm, as well as the special pricing under those contracts. This ensures

that employees of that firm always get the right price for each purchase. Ford Motor Company reports that by encouraging employees to buy PCs from its Premier Page, the company saved $2 million in one year.

Dell also has integrated its e-commerce Web site with all back-office systems, so that when a customer orders a custom-configured PC, that information is automatically transferred to the production system to ensure that the unit is built according to specifications. This also improves customer service; Dell will proactively notify any customer if a production problem or inventory shortage will delay delivery.

Electronic commerce, as used by U.S. firms, has already undergone several generations of evolution. Early experiences helped to stabilize e-commerce technology and set the development path for more sophisticated and useful technologies. Later experiences provided guidelines on strategic approaches and operational models that will help to improve e-commerce success.

Three key issues will determine the long-term viability of electronic commerce. These are:

  1. Technological feasibility, or the extent to which technologybandwidth availability and information reliability, tractability, and securitywill be able to sustain exponentially increasing demands worldwide.
  2. Socio-cultural acceptability, or the extent to which different global cultures and ways of doing business will accommodate this new mode of transacting, in terms of its nature (not face-to-face), speed, asynchronicity, and unidimensionality.
  3. Business profitability, or the extent to which this way of doing business will allow for profit margins to exist at all (e.g., no intermediaries, instant access to sellers, global reach of buyers).

As technology continues to develop and mature, the ability to assess the impact of electronic commerce will become more cogent. Moreover, the significance of privacy, security, and intellectual property rights protection as prerequisites for the successful worldwide diffusion, adoption, and commercial success of Internet-related technologiesespecially in places with less democratic political institutions and highly regulated economiesis continually increasing. The differentiation between the Internet (the global network of public computer networks) and intranets (corporate-based computer networks that involve well-defined communities and potentially more promising technology platforms for fostering Internet-related commerce) became significant in the late 1990s and early 2000s. Intranet development has surpassed the Internet in terms of revenueby 2005 more than half of the world's Web sites were commercial in nature.


Ned Kock, in his book Encyclopedia of E-collaboration (2008), gives several possible negative effects of e-commerce, if the trend continues at the same rate it is currently growing.

Global companies with highly developed online stores may already possess the extra edge to attract potential customers. This may leave beginning companies, eager to enter the online market, without much chance to make an impact. International competition may become skewed and lead to an unhealthy type of oligopoly in the e-commerce world.

Some also fear that e-commerce will allow companies to evade certain tax laws, especially when it comes to international trade. New regulations might need to be set for customs concerning online exchanges.

Others wonder how e-commerce will change the job market. While online business offers jobs to those with newer IT skills, it can also displace many traditional jobs.

SEE ALSO Consumer Behavior; Customer Relationship Management


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Commerce, Electronic


Any sales transaction that takes place via computer or over theinternet.

In 1990, nobody would have predicted that by the end of the twentieth century people could conduct nearly all of their commercial transactions electronically. Today, a person with a simple Internet connection can purchase anything from clothing to books to jewelry to stereo equipment online. It is possible to purchase insurance, pay one's telephone bill, and buy groceries over the Internet. Banking transactions such as transfers from one account to another can be accomplished online quickly and efficiently. Although most commerce is still conducted in person, more than one-third of adults in the U.S. made at least one purchase online in 2002.

Electronic commerce (or e-commerce) has its origins in the 1960s, with the introduction of a computerized check-processing system called the Electronic Recording Machine—Accounting (ERMA). Banks used ERMA to process billions of checks each year, making it possible for nine employees to do the work of 50. During the 1970s, companies began using Electronic Data Interchange (EDI) to process purchase orders, invoices, and shipping notifications. Although EDI could save time and money, it was an expensive and somewhat cumbersome system, and small to mid-size businesses could not afford it.

The introduction of the Internet in the mid 1990s opened electronic processing up to companies of all sizes; anyone with a computer could connect to a global system that reached into countless businesses and homes.

The first major "virtual" company to appear on the Internet was, founded by Jeff Bezos in Seattle. began doing business in July 1995. Its premise was simple: People could purchase books online through for less money than the same books would cost at a local bookstore. Because had no actual retail stores (the books were stored in a warehouse), it could afford to keep prices lower than the competition. If had a buyer's order in stock in its warehouse, it could be delivered within two to three days. In some bookstores, a special order for an out-of-stock book could take weeks. (Today, sells a wide variety of products in addition to books.)

Not long afterward, in September 1995, Pierre Omidyar and Jeff Skoll founded eBay, an online auction service. Essentially, eBay allows sellers and potential buyers to deal online; as with a live auction, various buyers bid for an item, and the seller accepts the highest bid.

In the ensuing years,, eBay, and similar virtual companies cropped up on the Internet. Established "brick and mortar" companies also established an Internet presence. Today, the average person can find the local lawyer, doctor, dry cleaner, and baker on the Internet along with companies such as and eBay. Not every company offers online retail services; in truth, many smaller companies merely have one or two web pages on their site with a telephone number and a link to an e-mail address. For some companies, the Internet has proven to be a double-edged sword. On the one hand, a growing number of consumers expect that the businesses they deal with will have a web site. Even many self-employed individuals have web sites for precisely this reason. On the other hand, a web site that has nothing of substance to offer will simply drive potential customers away.

Why do people shop online? One compelling advantage is convenience. The idea of being able to sit in front of one's computer, look at different objects, compare prices, enter some data, press a button, and wait for a package to arrive two or three days later is attractive to many people, especially if they do not live close to major retail stores. (Or, for that matter, a person on the East Coast can make an online purchase from a West Coast store.) Speed is another factor. Most e-commerce retailers offer two- or three-day delivery (or next-day service for an additional fee. An online bookstore might be able to ship a hard-to-find book to the buyer in less time—and possibly for less money—than a small neighborhood bookstore that tries to track the book down.

In 2002, according to UCLA's third annual Internet Report (released February 2003), the percentage of adults using the Internet to make purchases actually dropped to 39.7 percent from a high of 50.9 percent the previous year. That figure does not necessarily reflect a loss of confidence or interest in online shopping, although some people may simply stop making online purchases once the novelty wears off. In fact, the average number of purchases made by those who still use the Internet for shopping nearly tripled between 2001 and 2002, from an average 0.8 to 28.32. The average dollar figure also rose between 2001 and 2002, from $70.21 to $100.70.

Even consumers who use the Internet on a regular basis do not necessarily see online shopping as a routine option. In fact, according to the UCLA report, many Internet buyers wait before they make their first online purchase (nearly half waited more than two years after their first Internet experience). By far the most common reason cited (32.4 percent) is fear of providing credit card information online. Other reasons include fear of deception, not knowing whether the online purchase would be cheaper than a "live" purchase, and uncertainty over what is available for sale online.

Thanks to improved technology that allows information to be encrypted when it is sent from one computer to another, it is extremely difficult for an unauthorized person to obtain one's credit card number or social security number. (Proponents of e-commerce argue that it is no more dangerous to send one's credit card number over the Internet than it is to have it on a receipt that can be read by countless people.)

As for missing out on the experience of actually seeing and touching an object before purchasing it, many web sites now have detailed information as well as photographs of the merchandise being offered for sale. Even retailers that do not offer electronic purchases can do this. Lenscrafters, the large optical chain that is famous for its one-hour glasses service, clearly cannot sell its wares over the Internet. The Lenscrafters web site has pictures of many of its frames, as well as a guide to help visitors determine their facial shape and which frame would look best on them. (According to the UCLA study, many Internet shoppers browse through their local retail stores to examine a product, and after that they look on the computer to see whether they can order it for less online.)

A major breakthrough in safe electronic transactions came with the passage of the Electronic Signatures in Global and National Commerce Act. The statute, which was signed into law by President bill clinton on June 30, 2000, had been passed 426 to 4 by the House and unanimously passed by the Senate. Better known as the E-Sign Act, it removes one of the most stubborn barriers to e-commerce by making it safe for people to transmit personal information over their computer.

The E-Sign Act authorizes legal recognition of electronic (digital) signatures, contracts, and records. It also provides a uniform framework for all of the states to follow. A number of states had enacted their own laws, which made interstate electronic commerce cumbersome at best. E-Sign can be quite useful for people who need to sign something by a deadline. A person who wishes to purchase health insurance online, for example, can do so over the computer instead of having to fill out a form and mail it in and risk being presented with a rate increase that went into effect before the paperwork was received. With an electronic signature, the transaction is completed on the spot.

In June 1998, the U.S. department of commerce issued a white paper that called for the creation of a not-for-profit corporation to help manage the Internet's infrastructure. This corporation became known as the Internet Corporation for Assigned Names and Numbers (ICANN). The best known function of ICANN is its coordination of the Domain Name Service

(DNS). In other words, ICANN is responsible for overseeing the technology that allows Internet users to type in domain names (i.e., instead of long strings of numbers. This technology makes it easier for users to type in names of retail stores or online commerce sites. ICANN also oversees the Uniform Domain-Name Dispute Resolution Policy (URDP). This policy governs the methods by which corporate entities can choose and protect their domain names. All URDP cases are arbitrated through the World Intellectual Property Organization (WIPO), a group created in 1970 to safeguard intellectual property rights. Companies whose names are trademarked, or who are well-known organizations, are sometimes forced to contend with individuals who try to use a similar domain name. This practice is known as "cybersquatting." An example of a company that was the victim of cybersquatting is ABC Carpet Company, an established New York City-based retailer of rugs and other home accessories. In 1998, ABC registered the name "ABC Carpet & Home" (which it had begun using in 1995) with the U.S. patent and trademark office. Two separate individuals tried to use domain names with "ABC Carpet & Home" in them, and in both cases WIPO ordered that ownership of the domain names in question be transferred to the New York company. ABC Carpet Co. v. Helen Gladstone, WIPO Case No. D2001-0521; ABC Carpet Co. v. Tom Boltz and, WIPO Case No. D2001-0531.

One e-commerce question that has generated interest is whether states should be able to tax sales conducted over the Internet. Technically, Internet transactions are taxable, but a 1992 ruling by the U.S. Supreme Court held that states could only require sellers to collect taxes if they have a physical presence in the same state as the consumer. In 1998, Congress imposed a three-year moratorium against any Internet taxes, which was renewed for two years in 2001. Meanwhile, the National Governors Association (NGA) introduced the Streamlined Sales Tax Project (SSTP) in 2000 to adopt uniform tax rates among the 50 states. The estimated date for SSTP's completion is late 2005.

further readings

Mark, Roy. 2003. "Bush Backs Internet Moratorium." Boston Internet News (May 16).

Secretariat on Electronic Commerce. 1997. The Emerging Digital Economy. Washington, D.C.: U.S. Department of Commerce.

UCLA Center for Communication Policy. 2003. The UCLA Internet Report: Surveying the Digital Future. Los Angeles: University of California Regents.


Justice Department; Internet; Taxation; Telecommunications.

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Electronic Commerce


Electronic commerce, e-commerce or ecommerce consists primarily of the distributing, buying, selling, marketing, and servicing of products or services over electronic systems such as the Internet and other computer networks. The information technology industry might see it as an electronic business application aimed at commercial transactions. It can involve electronic funds transfer, supply chain management, e-marketing, online marketing, online transaction processing, electronic data interchange, automated inventory management systems, and automated datacollection systems. It typically uses electronic communications technology such as the Internet, extranets, e-mail, Ebooks, databases, and mobile phones. (Electronic commerce, n.d.)

It is fitting that this entry begins with the definition of e-commerce from a free encyclopedia, self-described as "the largest encyclopedia in history, in terms of both breadth and depth," entirely created by the voluntary contributions of the Internet communityfor that is a very good indication of the revolutionary basis upon which e-commerce has thrived. The entry on e-commerce in the previous edition of this work also began with a quote, but one in which it was seen more as a promise than a reality: "No single force embodies our electronic transformation more than the evolving medium known as the Internet. Internet technology is having a profound effect on the global trade in services" ("The U.S. Government's Framework," 1997). At that time Forrester Research, a market research company, estimated that e-commerce would increase to $1,444 trillion by 2003. In reality, e-commerce in the United States totaled $1,679 trillion in 2003, having met that earlier forecast several years ahead of schedule (see Figure 1).

And e-commerce, which encompasses both business to business (B2B) and business to consumer (B2C), is no longer a purely U.S. phenomenon. For example, Internet sales in the United Kingdom in 2004 totaled £71.1 billion in 2004, an increase of 81 percent from 2003, while purchases by consumers totaled £18.1 billion in 2004, a tripling in three years. On the other hand, the European Union had notably less e-commerce activity, when one excludes the United Kingdom. Thus contrast the thriving business to consumer growth in the United Kingdom and the United States with the astonishingly low numbers in the first quarter of 2003in France of just 75 million euros and in Spain of a mere 40 million euros. Obviously the story of e-commerce is one of mixed success, which indicates that the barriers to its growth are no longer technological, but the economic, legal, social, and perhaps even cultural infrastructure needed to support it.

As this illustrates, the basis of e-commerce is the extraordinary power of the Internet as a transformative force not just on business and the economy, but of the human imagination itself. It serves not just as a medium for the communication of information, but for bringing together like-minded people with a degree of transparency and economy never contemplated before. The above works on the assumption that many heads are better than one: that information that is aggregated through evolution is more than the sum of its parts. The same is true of e-commerce. At its most basic, e-commerce is simply an "electronic storefront" that replicates the printed catalog of the preInternet age. At its most innovative, though, e-commerce makes full use of the power of the Internet to create a unique type of commerce that has never existed before.

The quintessential example of the latter is eBay (, which began, as its name suggests, as an online extension of the familiar American tradition of the garage sale. But it rapidly grew to become an institution because of the realization that this was a mechanism for people with even the most esoteric tastes to meet and exchange with each other for profit in a way that was not feasible, let alone economic, before. Today it is the site of choice for anyone looking for the most unlikely of items that previously could be found only by searching through obscure shops. But eBay is far more than a boon for collectors, as it exploits a key driver of e-commerce: the economic externality of the network effect.


When a good or service possesses a network effect, then its value to a consumer depends on the number of other consumers who also purchase that item. Indeed, Metcalfe's law states that the total value of a good or service that possesses a network effect is roughly proportional to the square of the number of customers already owning that good or using that service. When eBay brings together potential consumers for one product, then they also serve as a potential market for other products. One consequence of this effect is that there is a tendency for a natural monopoly to be created, with anyone wishing to auction a product having little to gain and a lot to lose from going to an auction site other than the one with the most customers. EBay is now widely used by large businesses for B2B, as well as by auction houses for rare art and such high-value items as automobiles, boats, and even real estate, a far cry from its garage-sale origins.

Many dot-coms during the Internet boom of the 1990s claimed to be exploiting network effects, even to the extent of sacrificing current profits in order to buy the "eyeballs" needed to reach a critical mass of users. While much of that turned out to be illusory, there is little doubt that network effects are a fundamental driver of e-commerce, taking advantage of the Internet's abolition of time and distance to bring together large numbers of customers in one place. Sites such as take that effect into account when they use buyer recommendations as the selling point for their products. Allowing for the inclusion of such comments creates an online community in which potential buyers and owners can compare experiences. Similar practices are used to police buyers and sellers on eBay, or to rank the integrity of sites and products on, illustrating again the tremendous variety of the Internet when driving commerce.


As e-commerce has matured and become ubiquitous, it has attracted attention as a mainstay of the economy rather than as a novelty. Thus e-commerce sales are watched as closely as in-store sales for the health of the retail economy, with the traditional "black Friday" (the day after Thanksgiving) sales being followed by the "black Monday" the following week when workers allegedly use their office Internet connections to do their holiday shopping

online. Moreover, e-commerce is now the subject of extensive academic research, which is archival rather than speculative as it was in the late 1990s.

One of the most interesting findings of this research is that relating to why consumers buy books from Amazon. Professor Erik Brynjolfsson of the Massachusetts Institute of Technology has shown that the reason is not predominantly lower prices. Rather it is the variety of books that Amazon sells, especially of hard-to-find titles that dwarf on all dimensions what can be found at even the largest brick-and-mortar bookstore. "[Consumers] got about 10 times as much value from the selection as they got from the lower prices and competition. more value was created from the increased choice and selection," said Professor Brynjolfsson (quoted in Postel, 2004, p. C11).

In other words, value comes not just from the lower prices that more transparent competition allows on the Internet, but from the combination of greater choice and easy searching. These effects, Internet-based versions of economies of scale and scope, undoubtedly exist for many other e-commerce applications, from business-to-business marketplaces to online recruiting, music downloads, and even Internet dating. Evidently the dot-com collapse in 2000 has fulfilled its Darwinian purpose in winnowing out from e-commerce those firms that had no coherent business plan for the Internet, leaving behind firms that have a compelling logic in being online.


Although this discussion has focused thus far on examples from B2C, businesses are some of the most highly valued users of eBay and even Amazon. It needs to be kept in mind that B2B is really where all the action is, even if it does not receive the publicity of B2C. In 2003, 94.3 percent of all e-commerce activity in the United States was B2B, with a figure of 75 percent for the United Kingdom in 2004.

Businesses have found the Internet the ideal platform for conducting supply-chain management, fostering competition in suppliers, and reaching their sophisticated business buyers. This is especially the case since in today's economy what firms are mainly selling to each other is information, not just in the case of services such as banking and digital applications, but even when the product concerned is a physical product; the real value added comes from optimizing price and specification, as opposed to the physical transfer of the product. That is the role of the huge B2B marketplaces created by large companies, or even entire industries, which can be roughly described as eBay's for businesses (indeed, many firms have simply outsourced to eBay itself).

see also E-Marketing


Electronic commerce. (n.d.). Retrieved February 17, 2006, from Wikipedia Web site:

Metcalfe's useful equation. (n.d.) Retrieved November 11, 2005, from Killer-apps Web site:

Postel, V. (2004, April 22). Selection in ranks above price among the benefits of shopping online. The New York Times, p. C11.

U.K. National Statistics. (2006, February 9). Information and communication technology activity of UK businesses, 2004. Retrieved February 17, 2006, from

U.S. Department of Commerce. (2005, May 11). E-stats. Retrieved February 17, 2006, from

The U.S. government's framework for electronic commerce. (1997). Retrieved March 1, 2006, from

VisaEurope. (2003, May 20). Online spending in Europe doubles [Press release]. Retrieved February 17, 2006, from

Miklos A. Vasarhelyi

Michael Alles

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Electronic Commerce


ELECTRONIC COMMERCE, or e-commerce, is the conduct of business by electronic means. Following this general definition, e-commerce began soon after Samuel Morse sent his first telegraph message in 1844, and it expanded across the sea when another message, containing share price information from the New York stock market, linked Europe and North America in 1858. By 1877, Western Union, the dominant telegraph company, moved $2.5 million worth of transactions annually among businesses and consumers, and news companies led by Reuters sold financial and other information to customers around the world. The telephone permitted electronic voice transactions and greatly extended the reach of retail companies like Sears, whose mail-and telephone-order catalog helped to create genuine national firms.

In the twenty-first century, e-commerce referred more specifically to transactions between businesses (B2B e-commerce) and between businesses and consumers (B2C e-commerce) through the use of computer communication, particularly the Internet. This form of electronic commerce began in 1968, when what was called Electronic Data Interchange permitted companies to carry out electronic transactions. However, it was not until 1984 that a standardized format (known as ASC X12) provided a dependable means to conduct electronic business, and it was not until 1994 that Netscape introduced a browser program whose graphical presentation significantly eased the use of computer communication for all kinds of computer activity, including e-commerce.

To take advantage of the widespread adoption of the personal computer and the graphical browser, Jeff Bezos in 1995 founded to sell books and eventually a full range of consumer items over the Internet. Amazon went public in 1997 and in 2000 earned $2.76 billion in revenue, though its net loss of $417 million troubled investors. Other booksellers followed quickly, notably Barnes and Noble, whose web subsidiary—begun in 1997—also experienced rapid revenue growth and steep losses. One of the most successful e-commerce companies, eBay, departed from traditional retail outlets by serving as an electronic auction site or meeting place for buyers and sellers, thereby avoiding expensive warehousing and shipping costs. Its earnings derive from membership and transaction charges that its participants pay to join the auction. The company's profit of $58.6 million in 2000 made it one of the few to show a positive balance sheet. Other notable consumer e-commerce firms like the "name your own price" company and the online stock trading company E*TRADE suffered significant losses. Despite the backing of the New York Times, the financial news site The also failed to live up to expectations and eliminated most of its staff. Others did not manage to survive, notably the online-community

firm, which received strong startup support in 1998, and Value America, which sold discounted general merchandise and enjoyed the backing of Microsoft's cofounder Paul Allen and the FedEx corporation.

The business-to-business form of e-commerce fared better in 2000 and 2001, although a faltering economy lowered expectations. B2B e-commerce evolved with the development of the Internet. One of the leading B2B firms, i2 Technologies, was founded in 1988 as a business software producer to help companies manage inventories electronically. As the Internet expanded, the role of i2 grew to include the procurement and management of all the elements required to produce finished goods. Successful in this endeavor, its revenue grew to $1.1 billion and its profit to $108 billion in 2000. Another form of B2B e-commerce involves managing a market for firms in specific industries. VerticalNet, founded in 1995, links producer goods and services markets, earning money on commissions it receives for deals struck using its electronic marketplace. Other market-creating firms focus on specific products. These include Pantellos in the utilities industry, ChemConnect in chemicals, and Intercontinental Exchange for oil and gas. Concerned about this trend, manufacturers began creating their own electronic purchasing markets, the largest of which, Covisint, was founded in 2000 by General Motors, Ford, and Daimler Chrysler. In its first year of operation, the company managed the purchasing of $129 billion in materials for the automobile industry. Other B2B companies have concentrated on the services sector, with consulting (Sapient) and advertising (DoubleClick) somewhat successful, and health services (Healthion/WebMD) less so.

By 2001, electronic commerce had not grown to levels anticipated in the late 1990s. In addition to a decline in economic growth, there remained uncertainties, particularly in relation to the consumer sector. Buyers were slower than expected to change habits and make the shift from going to a store to shopping on a computer. Concerns about privacy and security remained, although some progress was made in setting national and international regulations. Businesses remained reluctant to guarantee strict privacy protection because selling information about customers was a valuable part of the e-commerce business. Nevertheless, business-to-business sales continued to grow and companies that developed their electronic sales divisions slowly over this period and carefully integrated their e-commerce and conventional business practices appeared to be more successful. Forecasters remained optimistic, anticipating the $657 billion spent worldwide on e-commerce in 2000 to double in 2001 and grow to $6.8 trillion by 2004.


Frank, Stephen E. NetWorth: Successful Investing in the Companies that Will Prevail through Internet Booms and Busts. New York: Simon and Schuster, 2001.

Lessig, Lawrence. Code and Other Laws of Cyberspace. New York: Basic, 1999.

Schiller, Dan. Digital Capitalism: Networking the Global Market System. Cambridge, Mass.: MIT Press, 1999.

Standage, Tom. The Victorian Internet: The Remarkable Story of the Telegraph and the Nineteenth Century's Online Pioneers. New York: Walker, 1998.


See alsoDigital Technology ; Internet ; Telegraph ; Telephone .

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