Implications of Pure Electronic Commerce for Vertical Integration

This article identifies how pure electronic commerce transforms the creatorpublisher relationship in the book and software industries. Pure electronic commerce refers to a transaction that uses information systems to avoid physical exchange and occurs entirely in the digital form. Using coordination and transaction cost theory as a theoretical framework, this article posits that coordination costs are a key determinant of vertical integration and intermediary tasks in the digital industries and help explain why the transition to pure electronic commerce has been slow. Despite the fledging state of the transformation, the article analyzes the two digital industries in such areas as compatibility standards, complexity of product development, after-sales support, intellectual property, development funding and marketing risks, and brand. The analysis of industry transformation leads to the conclusion that software is likely to be more vertically Implications of Pure Electronic Commerce for Vertical Integration 107 integrated than books. Also, once the coordination cost barrier is overcome, it is likely that there will be more vertical integration between developers/authors and publishers, which in turn may result in fewer, larger publishers and that publishers will eventually gain relative market power over the developers/authors.