There has been a revolution within computing and communications over the last few decades, and all signs are that technological advancements and the use of information technology will continue to accelerate. The dramatic rise in power and usage of new information technology has been supported by the decreasing cost of communications due to technological advancements and increased competition. Moore’s law states that microchips have a processing power of doubling every 18-months. These advancements present significant opportunities, but also pose great challenges. Innovations in information technology have wide-ranging impacts across many areas of society. Policy makers are addressing issues such as economic productivity, intellectual property rights and privacy protection. They also address access and affordability. The social and economic consequences of decisions made now are long-lasting.

Electronic commerce over the Internet is a revolutionary way to conduct business. This is one of the most important outcomes of information technology’s progress. Although it is only a few decades old, it could have a profound impact on economic activity and the social environment. It already affects large areas like communications, finance, retail trade, and may expand to education and health services. It refers to the seamless integration of information and communications technology throughout the entire value chain for a business that is conducted electronically.

Information technology and electronic commerce have a profound impact on the business model, market structure, work environment, labour market, education, society, and private life.

1. Market Structure, Commerce, and Business Models

Information technology can be used to reduce the importance of distance. This is one important way that information technology is impacting work. The geographic distribution of work in many industries is changing. Software companies have discovered that they can bypass the local shortage of software engineers by sending their projects to India and other countries where wages are lower. These arrangements take advantage of time differences to allow critical projects to be completed almost around the clock. Companies can outsource manufacturing to other countries and rely on telecommunications for close communication with their manufacturing teams. The technology allows for a more efficient division of labour between countries. This in turn can affect the relative demand for different skills in each country. Technology allows for different types of work and employment to be separated from each other. The technology allows firms greater flexibility in where they locate their business activities. This creates greater competition between regions for infrastructure, labour, capital and other resources. This opens up the possibility of regulatory arbitrage, where firms can choose which tax authority or other regulations to apply.

Communication technologies and computers also encourage more market-like production and distribution. A network of computing and communication technologies that provides buyers with access to information at a low cost and almost any price will help to reduce informational barriers to market operation. This infrastructure could also allow for real-time transactions. It will eliminate intermediaries like stock brokers, sales clerks and travel agents, who serve the essential purpose of providing information between buyers and sellers. The elimination of intermediaries will reduce costs throughout the production and distribution value chains. Information technologies have enabled the development of enhanced mail-order retailing. In this model, goods can be ordered quickly using telephones and computer networks. Then suppliers will dispatch the goods through integrated transport companies which heavily rely on computers and communication technology to manage their operations. Software, which is not physically goods, can be sent electronically to eliminate the need for transport. New payment methods are possible. This results in disintermediation across the distribution channel with lower cost, lower end-consumer price and higher profit margins.

An example of electronic commerce illustrates the impact of information technology on firms’ cost structures. When selling via electronic commerce, the key areas that reduce costs are physical establishment, order placing and execution, customer support and strong inventory carrying, distribution, and customer support. While it may be more expensive to set up an e-commerce website, it is much cheaper to manage than a physical storefront. It is accessible by millions of people around the world and has very few variable costs so it can grow to meet demand. Duplicate inventory costs can be eliminated by having one “store” instead of multiple. E-commerce can also be very efficient in attracting new customers. Advertising is usually cheaper than other media and is more targeted. E-commerce merchants can also check whether an order is internal consistent and that the invoice, receipt and order match. E-commerce allows firms to transfer a lot of customer support online so customers can access manuals or databases directly. This greatly reduces costs and improves the quality of customer service. E-commerce shops need fewer but highly-skilled employees. E-commerce allows for inventory costs to be reduced. A smaller inventory is required if the input can be ordered quickly and delivered immediately. In industries with a short shelf life, such as bananas, the impact of decreased inventories on costs is greatest. Bananas, is susceptible to rapid technological obsolescence (e.g. computers), or are in high demand for new products (e.g. books, music). While shipping costs can raise the price of many products purchased through electronic commerce and increase the final price, distribution cost for digital products like financial services, travel and software are much lower. These are all important segments of e-commerce.