Transaction risk in electronic commerce

Electronic commerce business models can add value by elimination of control and risk-bearing borne by channel intermediaries. But such markets may be less robust encouraging risky behavior. We explore a model of transaction risk in the migration from broker-mediated to electronic markets. The research finds that: (1) the risk of falsely accepting ‘bad’ orders is the critical risk measure for optimal control choice; (2) control policies and operational policies must be established simultaneously; (3) optimal control choice is strongly influenced by risk preferences; (4) at the margin, the decrease in risk from an additional increment of control is proportional to the market’s transaction volume; and (5) the discretionary budget sets the upper limit to control. D 2002 Elsevier Science B.V. All rights reserved.