What is Value Creation

Very early in the evolution of e-commerce, predictions were made that a significant degree of disintermediation would occur, i.e., that middlemen would be eliminated from the value chain through the use of the Internet. The reasoning was as follows. The economic benefit of middlemen, or intermediaries, is that they reduce transaction costs for functions that are outside the firm (Coase, 1937). Therefore, as digital technology reduced transaction costs in the open market, the role of these middlemen would be threatened (Tapscott, 1996; Downes & Mui, 1998). However, intermediaries have proven to be remarkably robust, even as they have transformed their roles and functions. The success of e-commerce firms like Amazon, eBay, and Yahoo is a testament to the continued value of intermediation. Even in an economy reshaped by digital technology, intermediaries still add value, and find new ways of doing so. This article examines the evolution and robustness of intermediation in e-commerce, by examining the fundamental economics of intermediation in terms of economies of specialization, scale, and scope. It considers ownership, transformation, and agency as different dimensions of intermediaries. It examines various intermediary roles, and how they are combined, driven by economies of scope and strategic attempts to capture value. It discusses how the various intermediary roles are changing in e-commerce, through the impact of digital technology. The specific case of financial intermediaries, at the forefront of digital technology usage, provides several examples (Singh, 2000). The conclusion is that intermediaries are important and varied enough that they will survive and thrive in the era of ecommerce. Disintermediation will not be a general outcome. Traditional intermediaries that perform manual tasks, or are part of slow or inefficient value chains are in danger, but the economic roles that intermediation plays are unchanged by e-commerce, and will be carried out in new ways.