A2 Final

To navigate please click on the hyperlinks embedded within this page to view research undertaken and detailed information, using eBay as an example, to respond to the question:

"What is the fundamental economic basis of Internet Commerce?"


eBay logo used with permission of eBay Australia - http://pages.ebay.com.au/help/policies/overview.html


The fundamental economic basis of e-commerce is a collection of business models which rely on the internet’s ability to connect users, enable distribution and transcend conceptual barriers such as time, space and money. Income generation is possible online because the internet creates channels between individuals, organisations, information, products and services which would have otherwise been difficult or impossible in the physical world.

The History of Internet Commerce

The National Science Foundation of America ran the internet until the mid 1990s. They banned all e-commerce until 1991 and only in May 1995 was the wholesale commercialisation of the internet allowed (Kelly 2005) It's not hard to find smart people saying stupid things about the Internet on the morning of its birth. In late 1994, Time magazine explained why the Internet would never go mainstream: "It was not designed for doing commerce, and it does not gracefully accommodate new arrivals." Newsweek put the doubts more bluntly in a February 1995 headline: "THE INTERNET? BAH!" (Kelly 2005)

Internet Business Models and Economies

While they are constantly changing and evolving, some of the key business models used today include: brokerage, advertising, merchant, manufacturer, infomediary, affiliate, community, subscription and utility. A business operating online is likely to draw from at least one, if not many of these models to generate income (Rappa, 2009). Although each business model varies in its approach, they are largely built on the connectivity and distribution afforded by the internet. For example, the brokerage model is based on an intermediary receiving commission for connecting consumers to consumers, consumers to business and businesses to businesses. On the other hand, the advertising model involves connecting internet users to information which, in turn, connects businesses with a relevant audience in which to advertise their product or service. Other models, such as the merchant and manufacturer models, take advantage of the internet as a distribution network which allows retailers to become “e-tailers” and reach a wider and often global customer base (Rappa, 2009).

E-commerce capitalises on the internet’s ability to transcend physical limitations such as time, space and money. Without the internet, a business’s customer base is generally restricted by a geographical area, operating hours dictated by local protocol and financial transactions made in cash or credit. Individuals or organisations who conduct some or all of their business online are rewarded with the potential for global reach, the ability to remain open all hours and the possibility of trading with digital currency through services such as PayPal. As internet usage moves increasingly towards mobile technology such as smartphones and tablets, e-businesses can tap into a market of consumers who are “always connected” and can be reached not only through direct contact and search engines but via community-based social networking platforms such as Facebook and Twitter (Tal, 2012).

Within e-commerce, there is talk of “new economies” which are “enabled and driven by connectivity” and challenge previous frameworks for conducting business (Braun & Billard, Unknown). Looking at the Network Economy, the Attention Economy and the Gift Economy as examples, value is created through social networks, by capturing an audience, and sharing or gifting goods, information and services (Gauntlett, 2004; Rifkin, 2001; Veale, 2005).

Ebay as an Example


Global auction website, eBay, is perhaps the best example of multiple business models and economies operating on one platform which relies on interconnectivity, wide distribution and the ability to overcome physical barriers of geography, time, language and finance. eBay claims to be the largest online marketplace in the world with over 100 million active members (eBay, 2012b) At its most basic, eBay operates as a broker (Rappa, 2009) with a business model which has “no inventory, low capital expenditures and global reach that minimises political and geographical boundaries” (Lillie, 2006).

Once quoted as saying "eBay is a company that's in the business of connecting people not selling them things." (Caban, 2007), eBay’s enormous financial success is largely due to a business model which relies on community. eBay is a service which connects members with other members in order to buy, sell and converse. eBay, itself, is only responsible for the web interface and maintenance of the software platform. eBay’s community of members are essentially responsible for income generation and manage all other aspects of the business, such as buying, selling, rating members and providing customer service through support and discussion forums (Lillie, 2006). Unlike e-tailers which involve one merchant selling to multiple consumers, eBay operates by linking multiple merchants with multiple consumers.

Despite trade embargos with certain countries – such as Cuba, Iran and Syria – and certain restrictions imposed on the kinds of products which can and cannot be bought and sold (eBay, 2012a), Ebay boasts an almost global-wide distribution area in which “practically anyone can buy and sell practically anything” (eBay, 2012b). With such wide distribution of so many varied products within an interconnected network, eBay is an effective example of what has been referred to within e-commerce as “The Long Tail”.

Key aspects of “The Long Tail” are the internet’s ability to offer “infinite shelf space” and “unlimited selection” (Anderson, 2004). A physical retail store in a fixed location generally markets towards a specific niche with a limited number of goods determined by supply and demand. On the internet, this scarcity becomes abundance as more sellers can offer a greater diversity of products across a wider distribution area (Anderson, 2004).and movies. Because smaller niche markets are now connected by the internet it enables more sales of a niche product to more people. Anderson (2009) establishes three rules in order to achieve this. 1) make everything available, 2) cut the price in half – then lower it again and 3) help me find it.

On eBay’s “Long Tail”, consumers can purchase the obscure and otherwise unobtainable. Some examples of unusual items, which may not have found a market in a retail environment, include golf balls once swallowed by a carpet python (SMH, 2008) and a piece of breakfast cereal which resembled movie character E.T. (Unknown, 2004).

eBay members are able to communicate and trade easily with each other because eBay is open all hours, speaks multiple languages and allows people to trade in something akin to a digital currency. eBay acquired PayPal as a solution for its members to be able to move money around more easily across international borders without sharing financial information (PayPal, 2012). eBay members who use the service for both buying and selling can use PayPal as digital credit which they can accrue and use to trade. This challenges the importance society places on currency and harks back to primitive times when people traded goods and produce, rather than money, in a gift exchange (Kranton, 1996). Today, and particularly in relation to the internet, this is called the Gift Economy.


As society and technology evolve, so will the internet economy. New innovations will replace existing business models and entrepreneurs will uncover unique and interesting ways to generate revenue online. However, at its core e-commerce will rely on the basic foundations which hold up every aspect of the internet – its ability to link people and generate connections, enable distribution across wider networks and transcend barriers of language, money, space and time. The satirical music video remix of the Back Streat Boys, 'I want it that Way' embedded below, demonstrates how eBay successfully traverses these aspects.

Anderson, C. (2004). The Long Tail, 2012, from http://www.wired.com/wired/archive/12.10/tail.html?pg=1&topic=tail&topic_set=

Braun, P., & Billard, S. (Unknown). Extending knowledge creation in cyber ba: connectivity, networking and regional development in an Australian context, from http://ballarat.academia.edu/wwwcriccomaucbpagesstaffpatricebraunphp/Papers/193805/Extending_Knowledge_Creation_In_Cyber_Ba_Connectivity_Networking_and_Regional_Development_In_An_Australian_Context

Caban, J. (2007). Business Environment of EBay, Wal-Mart, & Best Buy, 2012, from http://voices.yahoo.com/business-environment-ebay-wal-mart-best-buy-367735.html?cat=35
Ebay. (2012a). Embargoed goods and prohibited countries policy, from http://pages.ebay.com/help/policies/embargo.html
Ebay. (2012b). Who We Are, 2012, from http://www.ebayinc.com/who

Gauntlett, D. (2004). Basic Web Economics: How things work in the 'attention economy', from http://www.newmediastudies.com/economic.htm

Kelly, K (2005) We are the web, Wired Magazine, Issue 13.08, <http://www.wired.com/wired/archive/13.08/tech.html?pg=2>

Kranton, R. (1996). Reciprocal Exchange: A Self-Sustaining System. The American economic review, 86(4), 830-851.

Lillie, J. (2006). Immaterial Labor in the Ebay Community. In K.
Hillis, M. Petit & N. Scott Epley (Eds.), Everyday Ebay - Culture, Collecting and Desire. New York: Routledge.

PayPal. (2012). Welcome to the Press Centre - Get the latest on PayPal, 2012, from https://www.paypal-media.com/au/about

Rappa, M. (2009). Managing Digital Enterprise - Business Models on the Web, 2012, from http://digitalenterprise.org/models/models.html

Rifkin, J. (2001). When markets give way to networks Age of access : new politics of hypercapitalism where all of life is a paid for experience (pp. 16-29). Putnam: Tarcher Penguin.

SMH. (2008). Snake's golf balls fetch $1400, from http://www.smh.com.au/news/unusual-tales/snakes-golf-balls-fetch-1400/2008/01/11/1199988566831.html

Tal, H. (2012). Connectivity: The New Currency, from http://www.ecommercetimes.com/story/Connectivity-The-New-Currency-75234.html

Unknown. (2004). Nutri-Grain that looks like ET, from http://www.dailytelegraph.com.au/news/nutri-grain-that-looks-like-et/story-e6freuy9-1111115049240

Veale, K. (2005). Internet gift economies: voluntary payment schemes as tangible reciprocity Special Issue #3. from http://firstmonday.org/htbin/cgiwrap/bin/ojs/index.php/fm/article/view/1518/1433

Video - http://youtu.be/Fo3WuwimDHw

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