For release: Jan. 10, 2005

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Business-to-Business Transactions Dominate E-Commerce: St. Louis Fed Analysis

St. Louis — The rise of E-Bay and the increase in consumers who opted to go online to do their holiday shopping have made headlines, but an analysis by the Federal Reserve Bank of St. Louis indicates that the volume of business-to-business e-commerce transactions far exceeds that of business-to-consumer sales.

The analysis was conducted by Emin M. Dinlersoz, an assistant professor at the University of Houston, and Rubén Hernández-Murillo, an economist at the St. Louis Fed. Their comments appear in the January/February issue of Review, the Reserve Bank’s bimonthly journal of economic and business topics. The publication is also available on the Reserve Bank’s web site.

Working from the U.S. Census Bureau's "E-Stats Program" (available online at www.census.gov/estats), Dinlersoz and Hernández-Murillo looked at the diffusion of electronic business in the nation's economy. They documented the extent of that diffusion in three main sectors of the economy: retail, services and manufacturing.

To analyze the evolution of e-commerce, the economists put it in the context of the industry life-cycle, which suggests that industries are like living organisms in that they are born, they grow and they reach maturity. "An initial period during which only a few firms are active is followed by an episode of an escalating, and then peaking, number of firms that leads to a period of mass exit, called the 'shakeout.'," said Dinlersoz and Hernández-Murillo.

In the case of Internet-based retailers, they found that there has been a rapid development of the two initial phases of the e-commerce life-cycle: an initial increase in the number of firms, followed by a subsequent shakeout. "Although the current share of retail sales from e-commerce is still low," said the economists, "the sector has had high growth rates recently."

In addition, they found that Internet retailers that dominate the market in a certain category of products seem "more capable of expanding operations into other categories, and a vast array of product varieties has proliferated in Internet markets."
Dinlersoz and Hernández-Murillo's analysis revealed that:

• The diffusion of e-commerce sales was relatively rapid and widespread among electronic and mail-order houses, compared with other retail sectors. In 2001, the highest shares were observed in books and magazines, electronics, and music and videos. On the other hand, relatively low shares were observed in food, beer and wine, clothing and apparel, and drugs.
  
• Sectors leading the penetration of e-commerce sales include publishing, online information services, securities, commodity contracts intermediation and brokerage, computer systems design and related services. The travel industry, however, is far ahead of other industries in the share of e-commerce sales. "Transaction costs are much lower for this industry online than offline," they said, "and travel firms can pass these cost savings on to consumers. Another attractive feature is that the consumer can select different elements and stages of a trip, such as flight, hotel, car rental, and so on."
  
• As noted before, the volume of business-to-business e-commerce transactions far exceeds that of business-to-consumer e-commerce dealings. "This is particularly true in the manufacturing sector, where nearly all stages of production have been affected by Internet use," they said.
  
• Manufacturing industries that are viewed as technologically advanced tend to rank high in adopting Internet-based processes used to enhance production. Said Dinlersoz and Hernández-Murillo, "Although the most heavily adopted processes are obvious ones ? for example, basic Internet access, and access to vendors' products or catalogs ? we were somewhat surprised to find that other processes, such as bidding and the use of the electronic marketplaces, which were initially thought to thrive on the Internet, have not been widely adopted."
  
• Adoption rates of several Internet-based processes across plant sizes and manufacturing industries show that, generally, there is a "positive and statistically significant relationship between adoption rates and the size of a firm's plant.

Dinlersoz and Hernández-Murillo said the data on e-commerce developed by the U.S. Census Bureau so far was encouraging, but they hoped that additional research would provide more insight into the relationship between the Internet and the U.S. economy.

"For instance, new survey questions could be added to the Census of Manufacturers to gather detailed information on plants' use of the Internet," they said. "This practice would allow researchers to better understand the importance of digital inputs in the production processes and how the intensity of usage of such inputs compares to traditional inputs of labor and capital."

With branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. The St. Louis Fed is one of 12 regional Reserve Banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation's central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank holding companies, and provides payment services to financial institutions and the U.S. government.

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