28
World Bank Study
Electronic Intermediation
There are two basic mechanisms for coordinating the flow of goods through adjacent steps in a value chain: markets and hierarchies (Benjamin et al. 1986). Markets coordinate through supply and demand forces and exchanges between individuals and firms. Such exchanges are influenced by price, quality, quantity, and availability of the given good that will serve as an input into the next process. Hierarchies, on the other hand, coordinate the flow of goods between adjacent steps by controlling and directing at a higher level in the managerial hierarchy, rather than le ing market forces coordinate such flows. Managerial decisions, not market forces, determine the quantity and price of the goods required. As the size of a market grows, communication costs increase. New information technologies have greatly reduced the cost of acquiring, processing, and communicating information. The reductions have, in turn, resulted in changes in the way tasks are accomplished within firms and how firms manage the flow of goods within value chains. As such, and not surprisingly, they have had an important impact on logistics. Electronic coordination has two other important effects: brokerage and integration effects. Brokerage effect is the ability to put into contact with each other the many potential buyers and sellers and match them. When electronic information is used to link different processes, this is the electronic integration effect. A major benefit of such integration is the time saved. Electronic markets reduce the unit cost of coordination. The complexity of a product often determines the suitability of electronic markets. Products that are simple and can be standardized are particularly suited to such markets. It has been argued that early developers of biased electronic channels should expect that their competitive advantage will not continue indefinitely. O’Sullivan (1981) found that, initially, the use of IT leads to an overall shift towards increased coordination by markets rather than internal decision making by firms. IT innovations make it easier to acquire, manage, and process information and allow closer integration between adjacent steps in the value chain. However, over time, early adopters should plan for unbiased channels as information becomes more readily available. It is often asked if electronic markets lower the cost of market transactions and lead to disintermediation (i.e., the elimination of the role of intermediaries). However, several pieces of research now suggest that markets do not become dis-intermediated but become facilitated by information technology. In fact, the Gellman hypothesis holds true that while some traditional intermediaries may be diminished in electronic markets, new roles of intermediaries emerge. In this context, one of the areas receiving a lot of a ention in low-income countries, especially those in Africa, is the role that mobile telephones are playing in facilitating development and trade. This trend requires detailed analysis and is the subject of a dedicated study to complement this initial report. The next two sections explore in some detail logistics services intermediated by a cooperative and those managed through electronic intermediation.
Notes 1. Anh, Khandelwal, and Wei (2010) The Role of Intermediaries in Facilitating Trade, draft research paper. 2. The Container Corporation of India Ltd was established in 1988 and has off loaded about 37 percent of its equity on the stock market. 3. This is a significant innovation pioneered by U.S. Class I railroads that has contributed signifi-