CONSUMER WILLINGNESS TO BUY ONLINE USING TRANSACTION COST

ECONOMICS AND THE THEORY OF REASONED ACTION1

A Literature Review
Part 1 of 2

Shiloh Marren S. Laciste

Graduate Staffmember
School of Economics
University of Asia and the Pacific

Jovi C. Dacanay, Ph.D.

School of Economics
University of Asia and the Pacific

The digital age has now revolutionized the way transactions are conducted. A primary

example is the emergence of e-commerce. E-commerce refers to the purchase or sale of goods and

services between different entities (households, governments, and other public or private

organizations) using the internet and other networks. While the purchase and sale of goods and

services must be conducted online, the delivery and payment may either be done online or offline.

(Philippine Statistical Authority, n.d.)

The e-commerce landscape of the Philippines, compared to its Southeast Asian neighbors,

has not been so robust. As of 2016, the Philippines still has the smallest e-commerce share among

six markets in Southeast Asia. This is not surprising since only 46% of the 100 million Filipinos

have access to the internet. On top of that is the fact that the country has the slowest internet

connection speed in the Asia Pacific region (Kinasih, 2016). It currently has an average internet

1
The article is an excerpt from the Thesis Proposal of Shiloh Laciste. This article is published with her permission.
Dr. Jovi Dacanay is her thesis adviser.

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connection speed of 5.5 Mbps while its neighbors like Thailand is enjoying an internet connection

speed of 16.0 Mbps and South Korea with a speed of 28.6 Mbps. (Akamai Technologies, 2017)

(as cited in Barreiro, 2017). However, despite these setbacks, the future of e-commerce in the

Philippines still remains to be promising especially with the country being dubbed as one of the

fastest growing internet population in the world, with an estimate of 530% growth over the past

five years (2009 to 2014) (Greene & Dezan, 2014) and recently having a growth rate of 27% from

January 2016 to January 2017 (Subido, 2017). According to the International Trade Association

(2017), the Philippine e-commerce industry will continue to experience increasing growth and this

will be driven by the rise of the middle class and the upsurge of a young, tech-savvy population.

In addition, the growth is further aided by the availability of affordable smartphones partnered

with affordable mobile data packages provided by telecommunication companies and the

consumers’ incessant search for convenience.

One aspect of e-commerce is online shopping. Online shopping refers to the actual

purchase of a good or service from a pure play e-tailer (an online retailer that does not have a brick-

and-mortar store) or from a brick and click e-tailer (an online retailer that has a brick-and-mortar

store). As of 2017, almost 30.3 million Filipinos are reported to have shopped online (Subido,

2017). When Filipino respondents were asked why they prefer to shop online, 73.3% cited that it

is easy and 71.9% mentioned that it is convenient. In addition, it was found out that more Filipinos

are using their mobile phones to purchase items online – from 21.4% in 2012 to 34% in 2014,

according to the 2015 research of Mastercard (as cited in Pedroso, 2015). Moreover, the largest e-

commerce marketplace in the country, Lazada Philippines, is reported to have a total of 37.7

million website visits per month and Filipinos spends an average of 6.8 mins per session on Lazada

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applications (Lazada, n.d.). This highlights that many Filipinos are now recognizing the value of

online shopping.

Online shopping is not only gaining recognition among consumers and businesses but also

among researchers in the past decade. Online shopping behavior can be viewed through multiple

lenses including information systems, marketing, management science, psychology, and

economics. Some researchers have focused on studying online shopping behavior by employing

one approach, while the others combined two or three approaches from different disciplines. In the

case of the Philippines, there is a scarce research on combining two or three approaches that can

explain the behavior of Filipinos with regard to online shopping. The novelty of this study is to

provide a holistic view of a consumer’s willingness to buy online by presenting two main

perspectives: a transactional and a behavioral one. The transactional perspective will be explained

using the Transaction Cost Economics, while the behavioral perspective will be discussed in

support of the Theory of Reasoned Action which can be further broken down into two: Theory of

Planned Behavior and the Technology Acceptance Model. All these aforementioned approaches

are considered valuable in answering the statement of the problem for this study.

Statement of the Problem

Given the promising future of online shopping in the Philippines, it is then crucial to

examine: what drives the demand for purchasing products online? More particularly, what are the

factors that greatly affect consumers’ willingness to purchase products through the online channel

instead of the traditional channel (brick-and-mortar) channel?

Objectives of the Study

The following are the objectives of this study:

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  To empirically verify how antecedents of transaction cost affect consumers’ willingness

to buy online (transactional phase)

 To test how beliefs shaping attitude, beliefs about subjective norms, and beliefs about

perceived behavioral control affect consumers’ willingness to buy online (behavioral

phase)

Significance of the Study

Given the current number of online shoppers, online retailing (or e-tailing) presents itself

as an opportunity for businesses in the retail industry to further expand their volume sales and

widen their market reach. This is because of the convenience it offers to consumers given their

fast-paced lifestyle. In fact, the Department of Trade and Industry (DTI) recognize the growing

importance of online retailing in further amplifying the industry’s growth as manifested in its

Philippine E-Commerce Roadmap which was launched in 2016. The said roadmap aims to bring

e-commerce’s contribution to 25% of GDP by 2020. However, in order to help businesses

especially the small medium enterprises to venture into online retailing, it is crucial to know the

factors that affect their customers’ decision in choosing the online channel to purchase products.

Knowing the factors that greatly affect consumer choice will help them understand demand. If

companies better understand the demand of their customers, then they can provide products or

services more effectively and improve them so as to gain more competitive advantage, which

consequently can be considered as a win-win situation for both businesses and their customers.

This can also further spur businesses to venture into the online channel and eventually contributing

to the economic growth and development of the country.

Furthermore, only few literature have empirically tested the impact of perceived

transaction cost, attitudes, subjective norms, and perceived behavioral control of Filipino

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consumers on their willingness to buy online. In addition, no study yet has combined the three

approaches (i.e Transaction Cost Economics (TCE), Technology Acceptance Model (TAM), and

Theory of Planned Behavior (TPB)) in one study. Hence, this topic constitutes an important area

for research.

Scope and Delimitations

The study will focus on Business-to-Consumer (B2C) e-commerce, a type of e-commerce

transaction involving commercial enterprises and consumers since it has the widest array of e-

commerce platforms compared to other forms (Business-to-Business (B2B) and Consumer-to-

Consumer (C2C) e-commerce). It is also the type of e-commerce transaction that allows the

researcher to see both sides of the coin – the business and the consumer perspective. In addition,

there are many factors that can affect the online shopping behavior of consumers but from the

economic point of view with an extended analysis on behavior, the study will focus on economic,

technological and behavioral factors that could affect online purchasing behavior such as

examining the costs associated with the transaction process and the beliefs that shape the adoption

process of consumers. Furthermore, in testing the consumer choice model empirically, the study

will focus on consumers’ perceptions on transaction cost and on their own beliefs, rather than by

computing their actual transaction cost since actual transaction costs in the online channel are

difficult to measure, more so in computing for their belief system. “This is appropriate because it

is in fact, the perceived information that leads to customer decisions (due to bounded rationality)”

(Liang & Huang, 1998).

Moreover, the study will only be limited to respondents from the Philippines who are

reported to have used the online channel in purchasing products (a.k.a experienced shoppers).

Having to buy a product over the internet at least once constitutes a sufficient condition for one to

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be called an “experienced shopper”. In addition, the study will not evaluate any specific product

sold in the online channel nor assess any specific retailer’s website. Although a respondent is

allowed to select a product category as his frame of reference in answering the survey

questionnaire, this will not affect the interpretation of the results as the results will be analyzed

generally. In addition, there are many factors affecting consumers’ willingness to buy online as

discussed by several studies. However, the study will primarily be concerned with the factors

included in the researcher’s proposed model (i.e Transaction Cost model of Teo and Yu (2004),

Theory of Planned Behavior of Azjen (1991), and the Technology Acceptance Model of Davis

(1986).

REVIEW OF RELATED LITERATURE

What factors affect the consumers’ willingness to buy products in the online channel? The

article provides a brief history of e-commerce in the world and in the Philippines. It will then give

an overview of the several approaches in studying online consumer behavior and afterward will

zoom into the available literature for the chosen theories used in this study, namely: Transaction

Costs Economics and Theory of Reasoned Action (more particularly Theory of Planned Behavior

and Technology Acceptance Model). The chapter will end by discussing the role of trust in

studying online consumer behavior.

Historical Overview: E-Commerce in the World

The rapid advancement of information technology and modern communication have

brought upon unprecedented changes in organizational structures and business processes. It has

helped firms discover further their competitive advantage and has heightened the importance of

customers as part of the value chain because of the information they provide. It is because of the

magnitude of these changes that made firms recognize the need for e-commerce (Wigand, 1997).

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 According to Wigand (1997), e-commerce emerged no sooner in the 1970s. E-commerce

even though it may seem that it only became popular during the past decade, has already been

existing for over 30 years already (Becker, 2007). Wigand (1997) defines e-commerce as a “form

of economic activity conducted via electronic connections”. He further adds that “the bandwidth

of e-commerce spans from electronic markets to electronic hierarchies and also incorporates

electronically supported entrepreneurial networks and cooperative arrangements (electronic

networks). The market coordination mechanism is their common characteristic”. There are

different forms of e-commerce, namely: business-to-consumer e-commerce (B2C), business-to-

business e-commerce (B2B), and consumer-to-consumer e-commerce (C2C). These forms vary

depending on the nature of the parties and the types of transactions that these parties undertake.

For instance B2C e-commerce refers to the exchange of goods via the computer networks between

consumers and businesses. B2B e-commerce refers to the online purchases among businesses.

While C2C e-commerce involves consumers on both sides of the transaction, the exchange is

usually facilitated by an e-commerce intermediary. (Vanhoose, 2011)

The emergence of e-commerce was triggered by the development of electronic data

interchange (EDI). It is a mechanism wherein documents can be transferred between computers in

standard format. EDI originated in the mid-1960s when there was a frenzy to promote a paperless

office amongst transportation and some retail industries. EDI was powerful enough to enable

businesses to exchange information, place orders, and conduct electronic funds transfer through

computers (Sawanibi, 2001) (as cited in Becker, 2007). However, at that time, the process was

slow. Soon after, it was replaced by the internet, which is dubbed as the second generation of e-

commerce. The internet started as a research tool rather than a commercial tool. It was used

primarily by scientists and engineers working for the government and universities. Also, the

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internet requires a high level of computer skills in order to be used. That is why, in addition to the

scientists and engineers, only academics and researchers were capable of using it. (Eccleson, 199)

(as cited in Becker, 2007). It was only during the development of the graphical user interface (GUI)

and the navigability of the World Wide Web (WWW) that made it evolve as a commercial tool.

The popularity of the internet as a commercial tool only started in the mid-1990s. This was also

the time when e-commerce came into popular use. In 1995, Amazon, the world’s largest online

bookstore was launched. After a year, it already became a multimillion-dollar business. After the

launching of Amazon, eBay, the world’s first online auction site, was launched in 1996. This was

also the year when Dell decided to sell personal computers directly to consumers in the internet.

By 1997, the commercial domain (.com) replaced the educational domain (.edu) as the largest in

use (Kim, 1998) (as cited in Becker, 2007).

The late 1990s became known as the “dot-com bubble”, and the year 2000 and 2001 was

considered to be the bursting of that bubble. Stock prices of internet companies experienced a

sudden decrease, including Amazon and eBay. The crash was caused by the unrealistic

expectations for e-commerce which were heightened by the exaggerated projections of Silicon

Valley, Wall Street, and other government offices. The crash implied a slowdown of economic

and productivity growth. However, despite the bursting of the bubble, some internet-enabled

companies survived. Amazon for example, added “novel store-front features (e.g patented one-

click shopping), waiving shipping charges for minimum purchases, streamlining the supply chain,

developing partnerships to expand product and service offerings, and adding a consumer-to-

consumer auction component” (Becker, 2007)

The success of Amazon had led several companies to venture to the use of e-commerce.

Several brick and mortar stores have offered online products and services. However, some stores

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failed in establishing dominance in the online marketplace because of the lack of some aspects

essential to an online business such as technology utilization, strategic planning, target marketing,

and information intelligence. As a result, numerous issues emerged such as high shipping costs,

poor customer service, lack of consumer demand, concerns about privacy and security, and

inefficiencies in the supply chain (Becker, 2007)

However despite these failures, some companies have learned from it. This is the reason

why e-commerce continuous to expand in every corner of the marketplace. It is said that the

proliferation of e-commerce will not be the cause of the end of brick and mortar establishments,

but rather it will provide further opportunities for traditional commerce - promoting a world of

universal connectivity. (Becker, 2007)

Historical Overview: E-Commerce in the Philippines

In the case of the Philippines, electronic commerce only became popular after the

liberalization of the telecommunications sector. The country experienced an increase on the use of

telephones from 2 phones per person, it became 9 telephones per 100 persons by 2000. (Institute

for Labor Studies) (as cited in Lacson and Pasadilla, 2006). On the other hand, in terms of cellular

mobile phone usage, the numbers doubled from 6.45 million subscribers in 2000 to 15.2 million

in 2002. (NTC as cited in Lacson and Pasadilla, 2006). In terms of the use of personal computers,

computer penetration increased from 1.68 in 1999 to 2.2 PCs per 100 people in 2001 (ITU as cited

in Lacson and Pasadilla, 2006). As the years went by, the usage of these devices continues to

exhibit an upward trend especially after the advent of e-commerce and the introduction of the

internet.

According to Torral (n.d.) (as cited in Lacson and Pasadilla, 2006), the e-commerce in the

country during the year 2005 was estimated to be at US$3.5 billion. At that time, most of the

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transactions are attributed to business to business (B2B) e-commerce involving big companies

such as ShoeMart, Makro, Nestle, and Unilever. After the E-commerce law was passed, sales in

the realm of B2B e-commerce accelerated to US$40 million. Bayan Trade, a site devoted to e-

procurement, was one of the most popular in terms of B2B e-commerce. It is a joint collaboration

of six major conglomerates such as PLDT, Aboitiz, Ayala Corp. United Laboratories, JG Summit

and Benpres. (Lallana et al, 2002) (as cited in Lacson and Pasadilla, 2006). On the other hand, for

the Business to Consumer (B2C) e-commerce, Amazon.com was the most popular since most of

the transactions were mostly from book and software purchases. However, the growth of B2C e-

commerce was still hindered by the number of credit card subscribers in the country. As a result,

some online malls such as the estoreexchange.com, ayala.com, and infinitymalls.com offer

alternative modes of payment through reloadable cards, COD, bank deposits, and ATM cards.

Through the emergence of these different modes of payment, B2C continued to grow and many

firms have opened their online channel (Lacson and Pasadilla, 2006). Currently (year 2017), the

total revenue yielded by businesses from selling online in the Philippines is estimated to be at $1.2

billion pesos. In addition, 30.3 million people in the Philippines are reported to have made a

purchase via e-commerce. This suggests that 29 percent of the population is now using e-

commerce. (Subido, 2017)

General Overview on Online Shopping Behavior

There are many reasons that could explain the continued growth of e-commerce. One of

which is that compared to a physical store, an online store offers a number of advantages such as

it is convenient and saves the consumer time to travel and to wait in line. It can be accessible

anytime and anywhere, provided that the consumer has an internet connection. Also, the website

used is rich in information regarding products and services and allows the consumer to compare

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prices all at the same time. (Javadi, 2012). Hoffman and Novak (1996) claim that the secret

ingredient in the success of marketing communication on the internet is interactivity. Through the

use of the internet, product or service providers can now interact with their consumers more

effectively and also consumers are provided with more detailed information about products and

services (as cited in Javadi, 2012). Geissler and Zinkhan (1998) further argues that because of the

online channel, power is given more in favor of the consumers because they can compare and

evaluate products at the same time without the pressure from the salespeople (as cited in Javadi,

2012). Because of these advantages offered by the realm of e-commerce, both consumers and

producers are recognizing the value of online shopping. For this reason, the study of e-consumer

behavior have captured the attention of many researchers.

Currently, there is a wide array of approaches in studying e-consumer behavior. These

approaches are found in the realm of Psychology, Economics, and Technology. Studies in the area

of Psychology are characterized as consumer-centric (Hoffman & Novak, 1996; George, 2002;

Pavlou & Fygenson, 2006). Its focus lies on the study of demographics, perception of risks and

benefits, shopping motivation, and shopping orientation. In the realm of economics, studies are

characterized as transaction-specific (Liang and Huang, 1998; Teo, 2004; Teo and Yu, 2005;

Banerjee et al, 2012). Its scope is determining how the online channel can reduce or increase

transaction costs. Studies in the area of Technology are inclined more on the technical aspects of

an online store such as interface, design, navigation, payment, information, intention to use, and

ease of use (Koufaris, 2002; Li and Huang, 2009, Pavlou, 2003). What is good about these different

approaches, unlike other areas of research, is that they don’t contradict one another, rather they

complement each other in order to paint a more comprehensive picture on online shopping. For

instance, Koufaris (2002) have combined different theories from these three disciplines in studying

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the relationship between the acceptance of e-commerce and trust, risk, perceived usefulness and

perceived ease of use. He combined factors from information systems (technology acceptance

model), marketing (consumer behavior, and psychology (flow of environmental psychology) in

one model. Dennis et al (2009) also had presented an integrated model of e-consumer behavior by

combining social factors, situational factors, experiential aspects of online shopping, and consumer

traits. Their model was underpinned by the Theory of Reasoned Action (TRA). This theory is

considered to be a mother theory of other sub-theories such as the Theory of Planned Behavior

(TPB), Technology Acceptance Model, and the Unified Theory of Acceptance and Use of

Technology (UTAUT) wherein it postulates that a person’s behavior is influenced by his beliefs,

attitudes, and intention towards performing that given behavior. Pavlou and Fygenson (2006)

extended the TPB by incorporating other beliefs such as trust, perceived risk, social influence,

personal online skills and technology acceptance factors (e.g. perceived usefulness and perceived

ease of use) that may influence a consumer’s intention towards performing a certain behavior.

In the Philippine context, Lim (2014) studied the adoption of e-commerce in Manila by

using the model of DeLone and McLean. DeLone and Mclean’s model included ease of

understanding, personalization, reliability, and usability as factors affecting the intention to use e-

commerce. By using factor analysis and multiple regression analysis, her findings suggest that all

of the factors are significant except for usability in predicting the use of E-commerce. She suggests

that businesses can improve more on reliability (accuracy, fault tolerance, recoverability, and

security) at the expense of usability. The scope of the study of Lim was inclined towards more on

the technological aspects of consumer adoption.

Furthermore, previous researchers have also looked into demographics, identifying

whether it has an effect on online consumer behavior. In the study of Teo (2006), he compared the

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demographics of both adopters and non-adopters of online shopping in Singapore. His results

suggest that adopters of online shopping are predominantly male and well educated however they

tend to be older than non-adopters and have a higher income. His results were consistent with the

study of Sim and Koi (2002) wherein it was found out that adopters have higher monthly income

and more likely to hold credit cards (as cited in Teo, 2006). However, in analyzing experienced e-

shoppers alone (i.e those who often make purchases in the internet, Hernandez et al (2011) found

out that age, gender and income moderate neither the influence of previous use of the internet nor

the perceptions of e-commerce; in short, they do not condition the behavior of the experienced e-

shopper. Moreover, distinctions have also been made in terms of the type of online shoppers. In

the study of Chiou and Pan (2009), they were able to find out that price or value of a product is

more important to a light shopper, while trust is more important to the heavy shopper.

Given the substantial body of literature examining online shopping behavior, it is important

to delve a little deeper on the existing literature about the chosen models or theories of which this

study affords (i.e. Transaction Cost Economics Theory of Planned Behavior, and the Technology

Acceptance Model).

Transaction Cost Economics

Transaction Cost Economics (TCE) was first introduced during the 1930s. It was brought

about by the contributions of Commons (1934), Coase (1937), Llewllyn (1931), and Barnard

(1938). Commons pointed out the importance of transactions as a basis for analysis. He argued

that a contractual point of view must be adopted and that institutions must be established in order

to avoid dissonance between two different parties who have conflicting interests. Just like

Commons, Coase argued further that analysis of how markets and firms behave must be made on

a transaction cost economizing approach. While Llewllyn noted that the focus of the study of

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contract must lie on private ordering rather than legal centralism. Private ordering refers to the

“efforts by the parties to align their own affairs and devise mechanisms to resolve differences”.

Whereas legal centralism refers to the “dispute resolution under the legal rules evolved by the

courts and adopted by the state”. Furthermore, Barnard focused more on the industrial organization

and argued that “the powers and limits of internal organization be brought more self-consciously

to the core.” (Schmalensee et al, 1989)

Unlike other theories, the study of TCE subscribes to some behavioral assumptions that are

often judged by economic critics. This is because many economists believe that the importance of

a theory only arises from drawing out implications rather than forming assumptions (Schmalensee

et al, 1989). While TCE can draw some refutable implications, it also acknowledges that forming

behavioral assumptions is important because it makes the study of contract more feasible and

easier. Knight and Coase emphasized that it is valuable to accept and to understand “human nature

as we know it” rather than by solely dwelling on the view that man is a “rational utility maximizer”.

Coase (1984), recently stated that “Modern institutional economics should start with real

institutions. Let us also start with man as he is” (as cited in Schmalensee et al, 1989).

Using the ideas of Knight and Coase, Williamson has provided a clearer distinction

between a contracting man and a maximizing man. First, a contracting man is subjected to the

condition of bounded rationality. Second, a contracting man has the tendency to be self-interested

in a more troublesome kind compared to his maximizing man counterpart. This self-interested

characteristic is known as opportunism, moral hazard, and agency. It is because of bounded

rationality and opportunism that gives rise to transaction costs (as cited in Schmalensee et al,

1989).

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 Williamson (1981) states that the fundamental dimensions of transaction cost are depicted

by describing transactions. Transactions can be described in a number of factors such as through

asset specificity, degree or type of uncertainty present in a transaction, and the frequency of the

occurrence of the transaction. Figure 1 shows the TCE model.

Figure 1. Transaction Cost Economics Model

Source: Author’s Framework & Williamson (1981)

Asset Specificity is the most critical dimension for describing transaction but only a few

literature in organization has focused on it. The value of asset specificity in a transaction does not

depend whether there are large fixed investments but rather on the degree of the specialization of

the asset used in the particular transaction. It is said that the less specialized the asset used in a

particular transaction, the fewer hazards it entails because buyers can immediately turn to

alternative suppliers or that suppliers can sell their product to a variety of buyers. When the asset

specificity is high, both buyers and sellers are “locked into” the transaction. This is the reason why

asset specificity is critical, it is because “once an investment has been made, buyer and seller are

effectively operating in a bilateral (or at least quasi-bilateral) exchange relation for a considerable

period thereafter”. As a consequence, in the presence of asset specificity, both buyers and sellers

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make special efforts to design an exchange that would establish continuing relationship between

them. (Williamson, 1981)

There are different types of asset specificity according to Williamson. (a) site specificity -

where there are some kinds of transaction that makes an exchange more efficient when it is done

in a particular place. (b) physical asset specificity - where a specific type of physical equipment is

needed in the transaction. (c) human asset specificity – which arises from learning by doing. Aside

from the aforementioned types, Liang and Huang (1998), in their study of the online channel, have

added two additional types of asset specificity such as brand name specificity and temporal

specificity. (d) brand name specificity exists where there are buyers who would likely to engage

in a particular transaction if they prefer the brand name of a particular product. (d) temporal

specificity is present wherein if the execution of a particular transaction may need proper timing.

The timing can affect the costs of the exchange and its exact effect varies.

In Chiou and Shen’s (2006) study about determining the effects of satisfaction,

opportunism, and asset specificity on a consumers’ loyalty intention toward internet portal sites,

they have noted that in the case of internet portals, a user may have to invest his time and effort in

learning how to use the portal efficiently. If he decides to switch to another portal, then the value

of his specialized investments will decrease. In addition, they further suggested that asset

specificity will make users more dependent on the internet portal since moving to another will

involve corresponding costs. Hence, this hinders users to switch to other internet portals and may

increase loyalty.

On the other hand, in a particular transaction, there are a lot of uncertainties involved.

“Uncertainty refers to the cost associated with the unexpected outcome and asymmetry of

information”. (Williamson, 1985) (as cited in Teo et al, 2004). Due to bounded rationality and the

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probability of the other party to give in to opportunistic behavior, people become more reluctant

to engage in a particular transaction. According to Pavlou et al (2007), uncertainty acts a primary

barrier for consumers to purchase products online. It hinders inexperienced online shoppers to

adopt to online shopping. It is because of this that they recognized the importance of studying what

could mitigate the harmful effects posed by the perceived uncertainty of buyers. In their study,

they used the principal-agent approach in order to determine the antecedents of perceived

uncertainty and use these antecedents to draw out solutions as to how to mitigate this uncertainty.

Drawing from the agency problems of adverse selection (hidden information) and moral hazard

(hidden action), the authors were able to propose a set of factors that affect perceived uncertainty.

This includes perceived information asymmetry, fears of seller opportunism, information privacy

concerns, and information security concerns. In addition, four uncertainty mitigating factors were

enumerated such as trust, website informativeness, product diagnosticity and social presence.

Moreover, the different types of uncertainties that may arise in an online channel are as

follows: First is product uncertainty. Due to the lack of the use of the physical senses in further

assessing the quality of a particular product, there is a possibility that the product bought may not

meet the expectations of the online shopper. Hong and Pavlou (2010) made a study of the

antecedents and consequences of product uncertainty in online marketplaces by delving deeper

into the dimensions of product uncertainty such as description uncertainty (determining the

attributes of the product), performance uncertainty (the quality and future performance of the

product) and fit uncertainty (matching product’s characteristics with buyers’ needs). Among all

the dimensions of product uncertainty, the study focused more on product fit uncertainty. By

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testing their hypothesis through a survey of 274 buyers in Taobao2, their results showed that

compared to description uncertainty and performance uncertainty, only fit uncertainty had a

significant effect on “price premiums, satisfaction, product returns, and repurchase intentions, and

support the effects of the use of IT artifacts, such as instant messenger, product forums, and

decision support tools on reducing fit uncertainty.” The study of Korgaonkar and Karson (2007),

focused more on the effect of the type and level of perceived product risk to consumers’ loyalty

from three types of e-tailers. They examined pure play e-tailers (retailers that are selling products

only through the internet), value-oriented store based e-tailers, and prestigious store based e-tailers.

Their results suggest that among all the types of e-tailers, pure-play e-tailers still remains to be the

least preferred e-tailer format compared to a hybrid e-tailer (a retailer that has both a brick-and-

mortar and an online channel). It is suggested that the pure-play e-tailers still have to gain the trust

of consumers since they lack visibility which increases product risk.

Another type of uncertainty is behavioral uncertainty. Behavioral uncertainty arises

because of the opportunistic tendencies of the transacting parties wherein it breeds the possibility

that any of the transacting parties will not be able to fulfill his promise or may not adhere to the

contractual agreement. In order to lessen behavioral uncertainty, strict monitoring of the process

is needed however this may entail some costs.

Given these dimensions of transaction, researchers in the realm of e-commerce have used

the TCE framework in conducting their study to explain the behavior of consumers towards online

shopping adoption. Liang and Huang (1998) used the TCE in investigating what products and

2
Launched in 2003, Taobao (www.taobao.com) is the largest Internet retail Web site in China with 78 percent of the
Chinese-domestic online consumer market. It provides the most comprehensive product offering ranging from
collectibles and hard-to-find items to mainstream retail categories such as consumer electronics, clothing and
accessories, sporting goods and household products

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services are suitable for electronic markets and why they are suitable. They used five products

with different characteristics, these are books, shoes, toothpaste, microwave oven, and flower. By

gathering data from experienced shoppers and structural equation modeling as their method of

testing the model, their findings showed that the products examined have varying levels of

consumer acceptance on the electronic market, having books and flowers in the top list. In addition,

they found out that as shoppers gain experience, the concern over asset specificity diminishes and

only uncertainty remains. On the other hand, inexperienced shoppers are concerned with both asset

specificity and uncertainty. Unlike Liang and Huang (1998), Teo et al (2004) did not test for

different products in their study but rather studied more antecedents of transactions cost compared

to Liang and Huang which only had two (asset specificity and uncertainty). Teo et al (2004) added

two more antecedents to transaction costs, namely: consumer interest and trust. Consumers’

interest refers to the interest of the consumer from the exchange between him and the buyer. It is

postulated that the satisfaction of the consumer from the transaction could affect his perceived

transaction costs. On the other hand, trust refers to the willingness of the consumer to rely on the

online store in delivering his promises. In most of TCE literature, the kind of trust being integrated

is differential trustworthiness i.e “parties differing in their moral character” (Teo et al, 2004). Trust

has already been integrated into many studies in e-commerce, it has been used alongside with

different economic, psychological, and technological theories. It is for this reason that trust is

discussed in separate section.

Moreover, the study of Teo and Yu (2005) have included buying frequency in the model

as an antecedent of transaction cost. The reason why buying frequency is not included in the study

of Liang and Huang (1998) and Teo et al (2004) is that past researchers have failed to prove the

hypothesized positive relationship between transaction frequency and hierarchical governance

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(Rinde). However, the results gathered by Teo and Yu (2005) was able to support that buying

frequency is negatively related to perceived transaction costs.

The next issue shall focus on the theory of reasoned action.

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