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Chapter 1 Test Bank

1. E-commerce can be defined as:

a) the use of the Internet and the Web to transact business
b) the digital enablement of transactions and processes within a firm
c) digitally enabled commercial transactions between and among organizations and
d) both (a) and (c)
Answer: (d) (see pages 6-7)

2. T/F: Price transparency refers to the ability of consumers to discover the actual costs
merchants pay for products.
Answer: False: (see page 12)

3. The following are all unique features of e-commerce technology:

a) interactivity, global reach, information asymmetry, personalization/customization
b) universal standards, richness, information density, interactivity
c) information density, universal standards, personalization/customization, sales
d) local/regional reach, interactivity, richness, personalization/customization
Answer: (b) (see page 9, Table 1.1)

4. The ubiquitous nature of e-commerce reduces:

a) transaction costs
b) cognitive energy
c) both (a) and (b)
d) neither (a) nor (b)
Answer: (c) (see page 10)

5. E-commerce technologies have changed the traditional tradeoff between the richness
and reach of a marketing message. Prior to the development of the Web:
a) the smaller the audience reached, the less rich the message
b) the larger the audience reached, the less rich the message
c) richness equaled reach
d) none of the above
Answer: (b) (see page 11)

6. T/F: The total amount of B2C e-commerce revenues in 2001 is less than that spent on
B2B e-commerce.
Answer: True: (see page 6)

7. T/F In 2006, the total amount of B2C e-commerce revenues is expected to be greater
than the total amount of B2B e-commerce revenues.
Answer: False (see page 6)

8. B2C e-commerce involves:

a) businesses selling to businesses over the Web
b) businesses selling to consumers over the Web
c) consumers selling to consumers over the Web
d) all of the above
Answer: (b) (see page 13)

9. Which of the following cannot be considered a precursor to e-commerce?

a) Baxter Healthcare’s remote order entry system
b) m-commerce
c) the French Minitel
d) EDI
Answer: (b) (see pages 15, 19)

10. The E-commerce I era can be said to have begun in:

a) 1998
b) 1983
c) 1995
d) 2001
Answer: (c) (see page 20)

11. Which of the following may limit the growth of B2C e-commerce?
a) wireless Web technology
b) peer-to-peer technology
c) inexpensive personal computers
d) complex software interface
Answer: (d) (see page 23)

12. Which of the following was not a vision of e-commerce expressed during the E-
commerce I period?
a) a perfect Bertrand market
b) friction-free commerce
c) persistence of information asymmetries
d) first mover advantage
Answer: (c) (see pages 25- 26, 31)

13. Disintermediation refers to:

a) new opportunities for middlemen to aggregate content, products and services
b) the disappearance of market middlemen and the destruction of traditional
distribution channels
c) hyper-competition
d) the fact that when everyone uses the same tool or product, all participants receive
more value
Answer: (b) (See page 26)

14. The crash in stock market values for E-commerce companies throughout 2000 can be
attributed at least in part to:
a) a shortage in high-speed fiber optic telecommunications networks capacity
b) inflated stock market valuations of e-commerce companies
c) the fact that total e-commerce revenues in 2000 were less than they were in 1999
d) all of the above
Answer: (b) (see page 29)

15. E-commerce during the E-commerce I era has been:

a) a technological success and a mixed business success
b) a technological success and a business failure
c) a technological failure and a business success
d) a mixed technological and business success
Answer: (a) (see page 30)

16. Which of the following will likely characterize the E-commerce II era?
a) predominance of pure online strategies
b) emphasis on revenue growth vs. profits
c) stronger government regulation
d) first mover advantages
Answer: (c) (see page 32, Table 1.5)

17. T/F: During the E-commerce I period, it is likely that traditional, well-endowed,
experienced Fortune 500 companies will play a growing and more dominant role.
Answer: True {see page 32)

18. T/F: E-commerce as we know it today would not exist without the Internet and the
World Wide Web.
Answer: True (see page 15)

19. Which of the following is an example of P2P e-commerce?

Answer: (a) (see page 15)

20. Which of the following statements is not true?

a) In 2000, there were over 70 million Internet host computers in over 245 countries
b) In 2000, there were between 1 billion and 2 billion Web pages
c) In 2000, the Internet/Web had 80% share of United States households
d) all of the above
Answer: (c) (see page 16-17)

21. In addition to the Internet and the World Wide Web, which of the following
technologies is integral to understanding e-commerce?
a) client/server computing
b) wireless computing
c) peer-to-peer computing
d) mainframe computing
Answer: (a) (see page 38)

22. is considered to be a successful e-commerce company because it

showed a profit in 1999 and 2000.
Answer: False (see pages 3-5)

23. In the “small world” theory of the Web, you should eventually be able to reach any
Web page on the Web by following hyperlinks from other Web pages.
Answer: True (see page 18)

24. T/F: The universal standards of e-commerce reduce search costs for the consumer and
raise market entry costs for merchants.
Answer: False (see page 10)

25. T/F: The increase in information density due to the Internet and the Web result in
greater price transparency, greater cost transparency, and decreased price discrimination
in e-commerce.
Answer: False (see page 12)

26. T/F: Customization means to change a delivered product or service based upon a
consumer’s preferences or past purchasing behavior.
Answer: True (see page 12)

27. Which type of e-commerce is distinguished by the type of technology used in the
transaction rather than by the nature of the market relationship?
a) B2C
b) C2C
c) P2P
d) B2B
Answer: (c) (see page 13-14)

28. The World Wide Web is:

a) the most popular service that runs on the Internet infrastructure
b) a world-wide network of computer networks built on common standards
c) a network of computers created in the late 1960’s to connect a small number of
mainframe computers
d) none of the above
Answer: (a) (see page 16)

29. The first truly large-scale digitally enabled transaction system was:
a) the Baxter Healthcare telephone-based modem system in hospitals
b) the Wall Street Journal Online
c) the French Minitel
d) the Australian Digitrans
Answer: (c) (see page 19-20)

30. Which of the following is not a limitation on the growth of B2C e-commerce?
a) the sophisticated skill set required to use the Internet and e-commerce systems
b) expensive technology
c) the persistent global inequality limiting access to telephone service, PCs, and cell
d) the retrenchment and consolidation of e-commerce into the hands of large
established firms
Answer: (d) (see page 23)

31. ___________ occurs when everyone in a group receives value because all
participants use the same tool or product.
a) Disintermediation
b) A network effect
c) Friction-free commerce
d) A perfect market
Answer: (b) (see page 27)

32. The most significant technology that can reduce barriers to Internet access is:
a) electronic data interchange
b) digital subscriber lines
c) wireless Web appliances
d) shopping bot programs
Answer: (c) (see page 22)

33. Which of the following is not a characteristic of a perfect Bertrand market?

a) price, cost, and quality information is equally distributed
b) a nearly infinite set of suppliers compete against one and other
c) customers have access to all relevant information worldwide
d) the growth of regulatory activity both nationally and internationally
Answer: (d) (see page 25)

34. The crash in stock values for technology firms was caused by all of the following
a) the weakening of the concept of one world, one market, one price as
entrepreneurs discovered new ways to differentiate products and services
b) the excess capacity of high speed fiber optics that had been built in the
telecommunications industry
c) the 1999 e-commerce Christmas season in which the delivery problems of some
firms hurt the overall credibility of B2C e-commerce
d) the overvaluation of the stock of and technology firms, particularly e-
commerce firms who were not profitable.
Answer: (a) (see page 29)

35. The E-commerce I period was driven by all of the following factors except:
a) a huge infusion of venture capital funds
b) an emphasis on quickly achieving a very high market visibility
c) an emphasis on exploiting traditional distribution channels
d) visions of profiting from new technology
Answer: (c) (see page 27)

36. The reality in the E-commerce II period is that all of the following have proven true
a) economists’ visions of a friction-free market have not been realized
b) consumers are less price-sensitive than expected
c) there remains considerable persistent price dispersion
d) the market middlemen disappeared
Answer: (d) (see page 30)

37. Intellectual property is:

a) the legal exclusive right of the author of a creative work to control the copying of
that work
b) tangible works of the mind such as music, books, and videos
c) placement of material into the public domain
d) distinctive symbols, pictures, or words that distinguish and identify the origin of a
work or product
Answer: (b) (see page 38)

38. Which of the following statements is not true?

a) B2B e-commerce is the largest form of e-commerce with about $700 billion in
transactions in 2001
b) M-commerce is used most widely in Japan and Finland at present
c) P2P e-commerce provides a way for consumers to sell to each other with the help
of an online market maker
d) With current growth rates, by 2005, all B2C e-commerce will roughly equal the
annual revenue of Wal-Mart
Answer: (c) (see pages 13-14, 22)

39. E-commerce technologies make it possible for merchants to know much more about
consumers so that they can potentially:
a) develop new information asymmetries
b) enhance their ability to brand products
c) segment the market into numerous subgroups and charge each a different price
d) all of the above
Answer: (d) (see page 13)

40. Menu costs refer to:

a) the practical costs that are incurred by merchants in having to change their prices
such as the costs of re-labeling products, or re-entering prices into computer
b) on an income statement, the cost of purchasing raw materials and manufacturing
finished products
c) the theoretical costs of sales when there is no theft, waste, or breakage
d) reduction in cost per unit resulting from increased production, realized through
operational efficiencies
Answer: (a) (see page 26)

41. The predictions are that in the E-commerce II period:

a) overall revenues from e-commerce will grow by 40 % to 50% per year through
b) the first movers from e-commerce I will retain or increase their market share as
they continue to exploit economies of scale and switching costs
c) prices will rise to cover the real costs of doing business and pay investors a
reasonable rate of return
d) both a and c
Answer: (d) (see page 32)

42. E-commerce II will likely be characterized by:

a) the dominance of large traditional firms
b) stronger regulation and governance
c) venture capital financing
d) both a and b
Answer: (d) (see page 32)

43. The E-commerce I era is considered:

a) the most promising time in history for the successful implementation of first
mover advantages
b) an economist’s dream come true, where for a brief time consumers had access to
all relevant market information and transaction costs plummeted
c) a stunning technological success as the Internet and the Web increased from a few
thousand to billions of e-commerce transactions per year
d) a dramatic business success as 85% of dotcoms formed since 1995 became
flourishing businesses
Answer: (c) (see page 30)

44. Which of the following statements is not true?

a) No one academic perspective dominates research about e-commerce
b) There are two primary approaches to e-commerce: behavioral and technical
c) Information systems researchers take a purely technical approach to e-commerce.
d) Management scientists are interested in e-commerce as an opportunity to study
how business firms can exploit the Internet to achieve more efficient business
Answer: (c) (See page 39, 41-42)

45. A marketspace:
(a) extends the marketplace beyond traditional boundaries
(b) removes temporal and geographic restrictions on the marketplace
(c) Neither of the above
(d) Both of the above
Answer: (d) (see page 9)

46. Identify the seven unique features of e-commerce technology and explain how these
features set e-commerce apart from more traditional ways of conducting commercial

Answer: The seven unique features of e-commerce technology are: ubiquity, global
reach, universal standards, richness, interactivity, information density, and
personalization/customization. The ubiquity or availability nearly everywhere of e-
commerce extends the marketplace beyond traditional boundaries and removes it from a
temporal and geographic location. A marketspace is created in which shopping can take
place anywhere, enhancing consumer convenience and reducing shopping costs, whereas
in traditional commerce the marketplace is a physical place you must visit in order to
transact. The global reach of e-commerce means that commerce is enabled across
national and cultural boundaries as never before, with potentially billions of consumers
and millions of businesses worldwide included in the marketspace. Traditional
commerce, by contrast, is local or regional involving local merchants or national
merchants with local outlets. The universal standards – one set of technical media
standards – also allow the seamless enablement of global commerce. In contrast, most
traditional commerce technologies differ from one nation to the next. In traditional
markets, national sales forces and small retail stores can provide a complex and content-
rich message. However, there is generally a trade-off between the richness of the message
and the number of consumers who can be reached with the marketing message. In e-
commerce the trade-off is no longer necessary. An information rich environment is
extended globally. Unlike any other commercial technology of the twentieth century,
except perhaps the telephone, e-commerce technologies are interactive, allowing for two-
way communication between the seller and the consumer. E-commerce technologies
reduce information collection, storage, processing, and communication costs thereby
greatly increasing the prevalence, accuracy, and timeliness of information. This
information density – information that is more plentiful, cheaper, and of higher quality-
sets e-commerce apart from all other traditional methods of conducting transactions. E-
commerce technologies also permit the personalization and customization of marketing
messages on a level that was impossible with previous commerce technologies.
Marketing messages can be targeted to specific individuals based on their interests and
past purchasing behavior, and the product or service can be altered to suit a customer’s
preferences and prior behavior. All seven unique features set e-commerce apart from
more traditional ways of conducting commercial transactions. To come

47. Describe the visions and forces behind e-commerce I in terms of what the various
interest groups hoped for: the computer scientist and information technology people; the
economists; and the entrepreneurs, venture capitalists and marketers. Explain whether
what each group envisioned came to fruition and why or why not.
Answer: E-commerce I was driven by many different groups of individuals and these
groups did not necessarily share the same visions for how e-commerce should evolve. The
computer scientists and information technologists vision was of a universal
communications and computing environment that everyone could access with inexpensive
computers. Their interest was in creating a vast worldwide information collection from
libraries, universities, governments, and scientific institutions that was ungoverned by any
nation and free to all. They believed that the Internet, and by extension, the e-commerce
that operated within the infrastructure should be self-governed and self-regulated. The
economists objective on the other hand, was to achieve a perfect Bertrand market where
price, cost, and quality information is equally distributed. The marketspace they
envisioned would include a nearly infinite number of suppliers who had equal access to
hundreds of millions of customers, but where those consumers in turn would have access
to all relevant market information – a hyper-competitive market. They believed that, and
wanted the market middlemen to disappear resulting in lowered costs to consumers as
each of these payments to a middleman, who added little value to a product, was
eliminated. This intensely competitive, disintermediated environment with lowered
transaction costs would eliminate product brands and along with it the possibility of
monopoly profits based on brands, geography, or special access factors. Unfair
competitive advantages and the ability to reap returns on capital that far extended a fair
market rate of return would be eliminated. Their vision was called friction-free commerce.
The entrepreneurs, venture capitalists, and marketers of course had an entirely different
vision. They saw e-commerce as an opportunity to earn extraordinary returns on invested
capital. They saw the e-commerce marketspace and the technologies that enabled it as a
powerful method of increasing their ability to even more precisely segment the market
into groups with different price sensitivities. They believed that huge profits could be
garnered by firms who quickly achieved high market visibility and that these successful
first movers would become the new intermediaries of e-commerce, displacing the
traditional retail merchants and content suppliers.

The vision of an ungoverned and free-to all Internet held by the computer scientists has
not come to fruition as governments have increasingly sought to regulate and control the
technology to ensure that positive social benefits result. Their free-to-all concept is also
increasingly disappearing, as businesses, in order to survive, must charge subscription
fees for access to their content. The economists’ vision has also for the most part not
materialized for a variety of reasons. Consumers have proven to be less price sensitive
than expected and the importance of brand names to consumers’ perceptions of quality
and service have been extended rather than decreased or eliminated. The concept of one
world, one market, and one price has weakened as entrepreneurs have discovered new
methods for differentiating products and services. The extreme market efficiency they
envisioned has not come to fruition as new information asymmetries are continually
being introduced by marketers. Their vision of a disintermediated market has also fallen
by the wayside as few manufacturers actually developed one-on-one relationships with
the ultimate consumers of their products and new middlemen emerged. The visions of the
entrepreneurs, venture capitalists, and marketers have also largely not come to fruition as
the first movers of E-commerce I only rarely succeeded. The fast follower large
traditional firms with the resources needed to develop mature markets are displacing most
of the venture capitalist backed entrepreneurs. The costs for buying the technology,
developing and maintaining a site, and warehouse fulfillment have proven to be much
greater than these first movers anticipated and attempting to achieve profitability has lead
to massive customer defections. However, the technology-driven ability of marketers to
precisely segment markets, target messages, and practice price discrimination is rapidly
increasing in E-commerce II.

48. Define the terms e-business and e-commerce and explain the difference. What is the
key factor in determining if a transaction is “commerce”? List and briefly explain the five
main types of e-commerce. For the most part, what is the metric upon which the types of
e-commerce are distinguished?

Answer: E-business refers to digitally enabled transactions within a firm, involving

information systems under the control of the firm. E-business does not include
commercial transactions in which an exchange of value across organizational boundaries
takes place. E-commerce, on the other hand, is a revenue generating operation. The key
factor in determining if a transaction is commerce therefore is “exchange of value”. In
order to be e-commerce a transaction must include the direct production of revenue. The
five types of e-commerce are: B2C, business-to-consumer in which online businesses
attempt to reach individual consumers, B2B, business-to-business, in which businesses
focus on selling to other businesses, C2C, consumer to consumer, which provides a
market in which consumers can sell goods to each other, P2P, peer-to-peer, which
involves the use of file sharing technology, eliminating the need to go through a Web
server in order for individuals to share files and computer resources with each other, and
M-commerce, mobile commerce, which refers to the use of wireless digital devices to
enable Web transactions. The metric upon which each of these types of e-commerce is
distinguished is the nature of the market relationship – who is selling to whom, except m-
commerce, which is defined by the method of transacting.

49. In what ways was the E-commerce I era a success? In what ways was it less than
successful? Compare the nascent e-commerce environment to other technology booms.
What similarities in the progression of the business environment can be drawn?

Answer: The E-commerce I era was an unqualified technological success as the Internet
and the Web proved to be a sound architecture on which to build a viable marketing
channel. E-commerce transactions were seamlessly able to increase from a few thousand
to billions, and with some enhancements and strengthening will be able to continue to
grow without a glitch. It was also successful in that it quickly became a powerful source
for information distribution. E-commerce consumers quickly learned that they could
research products and services that they wanted to purchase offline in unprecedented ways
and to an incomparable extent. It was less than successful in that less than 10% of
companies were able to survive, and many of these have yet to become profitable.
However, online sales have continued to increase at an unparalleled rate (45% to 55% per
year) and are predicted to account for about 8% of total retail sales by 2005. Customers
have been attracted and revenues have been generated at a remarkable rate, yet individual
businesses have also departed at a noteworthy clip. The nascent e-commerce environment
is very similar to other technology booms in that all technology booms have seen the
spawning of new business models and strategies designed to leverage that technology into
commercial advantage and profit. New technology innovations have also generally been
accompanied by explosive early growth with thousands of new start-up companies
entering the market. These first movers have for the most part not survived in a period of
retrenchment and consolidation that follows. In the periods of retrenchment, it has always
been the larger established firms, those who have quickly followed the innovators into the
market, who have had the resources to be able to truly exploit the opportunities presented
by the new technology. The business environment for most new technology-driven
commerce, including, radio, television, and the automobile has eventually been
consolidated in the hands of a small number of powerful survivors.

50. List and explain four of the main reasons for the crash in the stock market values for
e-commerce I companies in 2000. What other factors do you think contributed to the
overvaluation of stocks?

Answer: The four main reasons for the crash in the stock market values for E-commerce I
companies in 2000 were first, the drop-off in spending for information technology that
occurred after the Y2K “crisis” had been averted. Once companies had rebuilt their
systems, information technology capital expenditures declined and the earnings forecasts
for the technology companies with them. Second, the telecommunications industry had
built excess capacity in high-speed fiber optic networks. When price wars broke out in the
telecommunications markets it became clear that the earnings in this sector would fall as
well and many small firms went bankrupt. Third, the 1999 e-commerce Christmas season
failed to produce the expected growth and several high-profile incidents of failure on the
part of e-commerce firms to deliver goods hurt the credibility of e-commerce in general.
Fourth, in the period of market exuberance (some call it irrational exuberance) that
accompanied the birth of e-commerce, the valuations of companies had in fact
been driven way too high. Investors finally came to the sobering conclusion that it was
highly unlikely these companies would ever be able produce earnings that would justify
the prices of shares. Many of the companies, in particular those devoted to e-
commerce, did not even have any earnings. Another factor that may have contributed to
the overvaluation of stocks is one of the very factors that defines the success of
the information age – instant access. People can act based upon information that is
garnered instantaneously and all at the same time. Within minutes people can react to
companies missed or exceeded earnings estimates, slight dips or gains in the NASDAQ, or
real or perceived future moves on the part of Alan Greenspan and the market will either
soar or plunge. In this age of high-speed information access and high-speed reaction to
that information, there is a perception that rapid progress is taking place. In fact,
innovation and productivity growth have not been anywhere near the pace they were in
other technological boom times, particularly the period in the first half of the 20th century.
High-velocity information may in fact have been a huge contribution to the market frenzy
that drove the stocks to their unprecedented heights. Furthermore, many of the wunderkinds were not funded by the venture capitalists to build profitable
revenue streams, but rather to attract “eyeballs”, and they did as instructed. In other
words, many of these companies were not built on a solid business foundation with a solid
business plan for creating revenue streams. Many of these businesses seemingly never
calculated how much business they would have to generate in order to turn a profit and
were still able to receive huge infusions of cash from venture capitalists or investment
bankers who funded their IPOs without sufficient proof that a sound business plan and a
solid management team were behind the deals.