DesignandImplementationofElectronicCommunities
LEVENTV.ORMAN orman@https://www.doczj.com/doc/33155542.html,
Cornell University, JohnsonGraduateSchoolof Management, Ithaca NY 14853
Abstract. Electroniccommunitiescanbedesignedtoorganizeconsumers,topooltheirpurchasingpower, andtoguidetheirpurchasingdecisions.Suchcommercialelectroniccommunitieshavethepotentialtofaci l-
itate the creation of novel marketplaces, and even radically change the buyer–seller interaction, as physical
communities did throughout the history. Commercial electronic communities are groups of consumers that
participate in the marketplace as a single unit. In addition to bargaining power gained from such bundling,
such communities can expand markets by reducing market uncertainty, and they have the potential to dras-
tically reduce transaction costs. However, these benefits are not automatic, and the optimum design and
implementation of communities are critical to their economic success. The size and the makeup of a com-
munity, the size and the nature of the product bundle it offers, and the concise description and efficient
implementation of the community as an electronic marketplace are all critical factors for the success of a
community.
Keywords:
electroniccommunities,electronicmarkets,marketdesign,marketimplementation,distributed markets
1. Electronic communities Electroniccommunitiesarevirtualgatheringplacesforpeoplesharingcommoninterests.
Bulletin boards and newsgroups were the earliest examples of virtual gathering places. Largenumbersofbulletinboardsandnewsgroupshavebeencreated,eachcharacterized
byatheme,andeachattractingusersinterestedinthattheme,andfacilitatinginteraction
and information exchange among them. Electronic communities are the current multi- mediaversionsoftheseearlyattempts,wherenotonlytextmessagesareexchanged,but photographs, audio and video files, interactive chat, conferencing, and database access
are available to community members [12]. Although communities have been studied extensively as a social phenomenon, their commercial applications have been limited
[5,12,15]. Early Internet vendors have established communities to facilitate interaction amongtheircustomers,inanefforttoengenderloyaltyandasenseofcommunityamong theircustomers,andtoengagecustomerstoextendthelengthofstayattheirsite[2,10]. Suchvendorcreatedcommunitiesareuseful,butverylimitedinscopeandfunctionality ascommercialenterprises.Theyarelimitedinscopetoonevendor’sproducts,andthey arelimitedinfunctionalitytoserveonlythecommercialinterestsofoneparticularven-
dor. More recently, buying cooperatives have been formed to pool buyers on the web to takeadvantageofvolumediscountsofferedbyvendors[2,10].Thesenewwebbusinesses
aremoreambitiousintheireffortstoorganizeconsumers,butstillfallfarshortofafullscale commercial electronic community, since membership is very ephemeral, and lim- itedtoasinglepurchasingdecisionforasinglegoodorservice.Electroniccommunities
designed to organize consumers, pool their purchasing power, and guide their purchas-
ing decisions have the potential to facilitate electronic marketplaces, and even radically
change the nature of buyer–seller interaction, as physical communities throughout the
history have often changed the nature of physical marketplaces. We will refer to such electroniccommunitiesas commercialelectroniccommunities.
Commercial electronic communities in their most general form are communities
that participate in the marketplace as a single unit. Such communities are similar to
consumer cooperatives, and they are often impractical in the physical world due to the intensiveinformationprocessingrequirementsinformingthecommunity.HealthMain-
tenance Organizations (HMO) are typical examples of commercial communities in the
physical world since the members negotiate with health care providers as a group, and
all members are entitled to all services provided by the HMO, which are bundled into themembershipprice.Suchcommunitiesaremorecosteffectiveinelectroniccommerce becauseofthereductionincommunicationandinformationprocessingcoststhatarees- sentialindesigning,forming,andoperatingacommercialelectroniccommunity,which wouldoftenbeprohibitiveinthephysicalworld.Thecriticalissuesindesigningelectronic communitiesrangefromdeterminingthefeasibilityandtheoptimumdesignofcommu-
nitiesto theimpactof such communitieson the markets andtheeconomyingeneral. Communitiescanbeviewedasbundlesofconsumers,andassuchtheyaresimilar
to bundles of goods, and their effect on the marketplace is symmetric to bundling of
goods. There is an extensive literature on bundling and its effect on the marketplace.
That literature is relevant both because of the similarities of the impact on the market, butalsoforcomparisonpurposestodeterminewhatcommunitiescanprovideaboveand
beyond bundling of goods[3,4,7,8].
2. Design issues
Community design is an interdisciplinary endeavor. Technology and economic issues areintertwinedinseparably.Theoptimumdesignrequiresacomprehensivetreatmentof bothtechnicalandeconomicissues,astheyrelatetoboththeinternalorganizationofthe communityand itsimpact on the markets [5,11].
The most fundamental problems are in the internal organization of communities,
as that defines the relationship between the community and its members. There is a
spectrum of possibilities: At one extreme, a pure community is where all members are entitledtoallgoodsandservicesprocuredbythecommunityoperator,allbundledinone
membership price. A segmented community is where members have varying privileges andentitlements,whichisequivalenttomultiplesubcommunities.Attheotherextreme,
a community where the members are only entitled to the option to acquire any of the goodsandservicesforadditionalfees,whichisequivalenttoaretailerwithmembership discountsasinshoppingcards.ApurecomDESIGNANDIMPLEMENTA TIONOFELECTRONIC COMMUNITIES 165
intensiveinformationprocessingrequirements,butquitefeasibleinelectroniccommerce
with its reduced communication andinformationprocessingcosts.
Purecommunitiesraiseanumberofdifficultorganizationalandtechnicalquestions.
The effective description of a community for the market place is the most fundamental
https://www.doczj.com/doc/33155542.html,munitiesareabstractstructures,andtheyneedtobedescribedforthemarket
place to facilitate the consumers’ decision processes to join a community. At a sim-
plistic level, they could be described as bundles of goods and services procured by the community operator in the past, and those bundles can be used as an indicator of future procurements.Themembersstayinthecommunitytotheextentthatthevaluegenerated bythecommunityoperatorjustifiestheirmembershipfees,andthevaluetheyreceiveis
higher than the value generated by competing communities plus switching costs. Such descriptions are practical, but ignore the vast potential of communities combined with abstractdescriptions.Abstractdescriptionsforabstractstructures,suchascommunities,
are likely to generate value by encouraging abstract decision making, and a significant
drop in transaction costs, above and beyond what can be achieved with bundling. The
typical examples in this area are mutual funds for investors, where the funds are de-
scribed in terms of their risk/return characteristics, not as bundles of stocks, bonds and commercial papers. Mutual funds are pure communities with abstract descriptions, and
provide a rare but almost perfect example from the physical world. Another example
of a pure community is governments at various levels. The government leadership is
elected on the basis of abstract and often philosophical descriptions, such as smaller government or environmental protection. The government then enters the marketplace andparticipatesinpurchasesonbehalfofthecitizenrythatitrepresents,andallcitizens
benefit(potentially)https://www.doczj.com/doc/33155542.html,ernmentsprovide
a second rare example of a pure commercial community. The fundamental information systemquestionishowtoeffectivelydescribecommunitiesforthemarketplace,andhow tomatchthosedescriptionstotheabstractdescriptionsofconsumers.Thematchingpro- cesscanbeautomatedasindatabasesearches,semiautomatedasintextsearchengines,
or manual as in the physical world with mutual funds, HMO’s, or governm ents. In all
cases, an effective and preferably abstract description both for the communities and for theindividualsis essential[13].
Communities are not completely independent of each other. Not only their mem-
berships may overlap, in effect creating subcommunities at the intersection, but also communitiesmaycombinetoformlargerandmoreabstractcommunities.Acommunity ofsingleparentsoftoddlerswouldbeasubcommunityofsingleparents,andthatwould beasubcommunityofparents.Acommunityofmembersbelongingtoacitygovernment arealsomembersofthecorrespondingstategovernment.Suchhierarchicalrelationships
can create a rich tapestry of abstractions and aggregations, and can lead to powerful marketmechanismsthatarequitenovel.Suchstructuresarerareinthephysicalmarkets, oreveninthecurrentelectronicmarkets,buttheyarequitecommonininformationsys-
tems in the form of database abstractions. As markets are implemented more and more aspuredatabaseapplications,andconsumersandproductsarerepresentedaselectronic
collections of data, such database constructs have immediate applications in buildingmunityisrareinthephysicalworld,duetoitsabstract market structures. All the accompanying database concepts such as inheritance
of attributes within a hierarchy, and aggregation of semantic descriptions to form more
abstract descriptions,allapplydirectlytothehierarchyofcommunities[1,11].
Communities do not exist in a vacuum, but participate in markets. The interaction
of communities with markets also raises a number of significant research issues. The mostobviousadvantageofacommunityisthatitallowsconsumerstobandtogetherand negotiateasagroup,andgainmarketpower.Inthisrespect,acommunityactsasabuying
cooperative. Moreover, a community operator who participates in the market place for
the whole community, and purchases goods and services for the whole community, can
reduce transaction costs significantly. Such reduction in transaction costs of consumers allowsthemtoengageinpricediscoveryandsearchmoreeffectively,andeliminatesthe informationasymmetrybetweenconsumersandsuppliersthathavealwayscharacterized
physical markets. Communities also benefit suppliers, since they allow the suppliers to
do more effective targeting by using community descriptions, and to do more effective andlargescalebundling,oftenacrossmultiplevendors,totakeadvantageofconditional
utilities, and cross subsidies within bundled goods. Finally, communities lead to more expanded markets, since they allow better price discrimination, although the excess
profits extracted through community-based-price-discrimination do not necessarily all
accrue tothe suppliers.
Markets themselves may need to be redesigned to accommodate communities. Communitiesarenotlikelytoreacttopriceandqualityinformationinthesamemanner
as individuals. The information needs of a community operator are much more exten-
sive and often much more formal. The databases that support markets may have to be extendedtosupportmuchmoredetailedandabstractdescriptionofgoodsandservices,
and also incorporate the descriptions of communities for possible automatic matching. Exchangemechanisms,paymentsystems,marketclearingalgorithms,trust,security,and insurancemechanismsmayallneedtobeslightlymoreformal,morecomprehensive,and moreautomatedtoaccommodatetheneedsofcommunities.Theprimaryreasonforsuch formalityisthelargesizeandvalueofeachtransaction,asopposedtosmallunitsoftrans- actionswhenthemarketiscomposedofindividuals.Advertisingandconsumerbehavior islikelytochangedrastically,becauseoftheintroductionofacommunityoperatorasan
intermediary to transactions, and as an agent of the consumer. The consumer-business interactionresemblesmoreabusiness–businessinteraction,whenacommunityisformed andthecommunity operatorintervenes asanintermediaryon behalfof thecommunity. Communities themselves create new types of markets, where the consumers can shopforcommunities,findcommunitiesthatbestmatchtheirneeds,andbecomemem-
bers.Thestructureofsuchsecondarymarketsisadifficultresearchissue,anditishighly intertwinedwiththesemanticdescriptionofcommunitiesexplainedaboveasatechnical researchissue.Membershippricingandcrosssubsidieswithinthecommunityaremore advancedissuesthatrequireasaprerequisitetheresolutionofcommunitydescriptionand communitysearchissues.Whyandhowanindividualbecomesamemberwilldetermine hiswillingness to pay for membershipandstaya member. DESIGNANDIMPLEMENTATIONOFELECTRONIC COMMUNITIES 167
3. Bargainingpower
Communities can have economic benefits both for consumers and for businesses. The obviousbenefittoconsumersisthenegotiatingpowergainedbypoolingtheirpurchasing
power.Theobviousbenefittothevendorsisawelldescribedandfocusedmarketthatis availableforprecisetargeting.Theadvantagetobothpartiesisasignificantreductionin
transaction costs, due to bulk purchasing for the whole community, and better-targeted marketing. A less intuitive advantage of communities is their ability to expand markets andgenerateasurplusaboveandbeyondwhatcouldbeachievedwithoutcommunities. Suchaneconomicsurpluscanmakeallpartiesbetteroff,providingastrongjustification
forthe creation ofcommunities.
However,aneconomicjustificationforcommunitiesdoesnotrequireforallparties
tobebetteroff,butonlythecommunityitself.Acommunityorganizercanformacom- munityasaseparateeconomicentitythatentersthemarketplaceonbehalfofitsmembers. Suchacommunitywouldbeeconomicallyfeasibletotheextentthatitcanextractasur-
plus for the community from the marketplace. That surplus can be viewed as additional consumersurplusforthecommunitymembers,orasprofitsforthecommunityoperator, oracombinationofboth,dependingonthenatureofthecommunity.Thatsurpluscanbe aportionoftheeconomicsurplusgeneratedbythecommunity,leavingtheremainderof
the surplus for the suppliers, making all parties better off. Alternatively, the community
surplus may be extracted from the suppliers’ profits, by using the increasing bargain-
ing power of the consumers in the community, leaving the suppliers worse off. Either possibility, or a combination ofthetwoleads toaneconomicallyfeasiblecommunity. Considerapopulationof4consumers,andamonopolistsupplierofasinglegood.
Let the reservation prices of the consumers for the good be 4, 7, 8, and 9 respectively,
and the marginal cost of producing the good is 2/unit. The optimum price set by the
monopolist will be 7, with a total profit of 15, and a total consumer surplus of 3, as
shownin figure1. Nowconsiderapairwisegroupingoftheseconsumersintotwocommunities,with
reservationprices4+7 = 11,and8+9 = 17.Eachcommunityconsistsof2consumers
and will buy a package of 2 units of the good, if its price is below its reserFigure2. The total profit and the total consumer surplus for 2 communities with reservation prices 11 and
17, and amonopolist supplier ofa good with marginal cost of4.
or it will buy none. The marginal cost of a two-unit package is 2*2 = 4. The optimum pricesetbythemonopolistforatwo-unitpackageis11,thetotalprofitsare14,andthe
total consumer surplusis 6, as shown infigure2.
Clearly, the communities, by using their bargaining power, extracted additional
surplus, raising it from 3 to 6, at the expense of the supplier, whose profits fell from
15 to 14. The community accomplished this by pressuring the supplier to lower its unit
price from 7 to 11/2 = 5.5, as a direct result of bargaining power gained by forming a community.
The additional consumer surplus is not necessarily achieved at the expense of https://www.doczj.com/doc/33155542.html,munitiescanexpandmarkets,andgeneratesurplusthatcanbenefit
all.Bothconsumersandsupplierscanbebetteroffasaresultofcommunities.Consider
a different pairwise grouping of the four consumers into two new communities, with reservation prices of 4 + 8 = 12, and 7 + 9 = 16. The marginal cost of a two-unit
package is still 4. The optimum price set by the seller will be 12, with a total profit of
16, and thetotal consumer surpluswillbe4,asshowninfigure3.
Clearly, these communities generated enough surplus to make both parties better
off.Theseller’sprofitswentupfrom15to16,andthetotalconsumersurplusrosefrom
3to4. The communities accomplished this by expanding the market, and generating
additional economic surplus for alltoshare.vation price, DESIGNANDIMPLEMENTATIONOFELECTRONIC COMMUNITIES 169
Figure4.
Profitasafunctionofpriceandmarketvariance,whichsummarizestheproblemfacedbysuppliers.
Not all communities are beneficial. Some communities do not benefit the con-
sumers,andhencetheyarenoteconomicallyviable,sincetheconsumershavenoincen-
tive to join them. Consider, a third possible pairwise grouping of these consumers into twocommunitieswithreservationprices4+9 = 13,and7+8 = 15.Themarginalcost
of a two-unit package is still 4. The optimum price for the seller will be 13, with total
profitsof18,andatotal consumer surplusof2,asshowninfigure4.
Clearly,theconsumersurplusislowerthantheopenmarket,sinceitwentdownfrom
3to2.Consequently,thesecommunitiesarenoteconomicallyfeasible,sinceconsumers havenoincentivetojointhem.Thecriticalquestionforacommunityoperatorishowto determinetheoptimumcommunity,andtodesignittomaximizethecommunitysurplus. Thecriticalvariableisthevarianceofreservationprices,ormarketuncertainty.Itis nosurprisethatasthevariancedecreases,thesupplier’sprof itsgoupbecauseofbettertar- getedpricing,andconsumersurplusfalls.However,thatisnotuniformlyso.Atveryhigh
variances,thetrendcanreverseitself,themarketcanshrinkconsiderablybydraggingthe
consumer surplus down, and the suppliers may take advantage of the shrinking market byconcentratingon thehighendcustomers,andcanactuallyincreasetheirprofits.The
basic economic problem is a game theoretic problem. The suppliers control prices and setthemoptimallytomaximizeprofits,andcommunitiescontrolmarketuncertaintyand
setthem optimallybydesigningtheircommunitiestomaximizetheirsurplus.Suppliers’problemistosetthepricesoptimallyforagivenmarketvariancecreatedbycommunities. Thecommunities’problemistosetthemarketuncertaintyoptimallybydesigningtheir communitiesgiventheassumptionthatthesupplierswillrespondbysettingpricesopti-
mally.Givenauniformdistributionofreservationprices,simulationsusingMathematica
software show that profit is a unimodal function of price, for each market variance, and
the optimum price decreases as the market variance increases. Figure 4 summarizes the
problem facedbythesuppliers.
Similarly,theconsumersurplusisaunimodalfunctionofmarketvarianceassuming anoptimalsettingofpricesbysuppliers.Acommunityoperator’sproblemistodesignthe optimumcommunitythatmaximizesthecommunitysurplus,bycomputingtheoptimum
point v,as shown in figure 5. 170 ORMAN
Figure5. Theeffect of marketuncertainty on thesupplierprofits and community surplus.
4. Transactioncost Economicviabilityofacommunitydoesnotrequireamonopolistselleragainstwhicha communitycanexercisebargainingpower.Acommunitycanbeviableeveninacompet- itiveenvironment,withcompetitiveprices.Inacompetitiveenvironment,evenwhenthe
bargaining power is not a relevant issue, a community can produce significant surplus
through savings in transaction costs. Savings in transaction costs can be considerable
since the members of the community do not have to engage in market transactions in- dividually, but the community operator executes market transactions on behalf of all members. Such a community would be able to reduce transaction costs in proportion
to the size of the community since the community operator would develop expertise,
perform the search for goods, and execute each transaction only once on behalf of all members.Moreover,thecommunityoperatorwouldbundleanumberofproductsthatare
relevant to the community, and further reduce transaction costs by developing expertise
in a line of products, and by using the expertise developed in one product in acquiring
other similarproducts.
Economic viability of a community does not require the community to be an or- ganicstructureemergingspontaneously.Acommunitycanbecreatedasanindependent businessbyacommunityoperator.Thecommunityoperator’sobjectiveistodesignthe optimumcommunitytomaximizeitsprofit.Thecommu nityoperator’sprofitisaportion ofthesurplusgeneratedbythecommunity,whichwasdiscussedintheprevioussection.
The community operator’s profit is determined by the revenues r from members in the formofmembershipfees,thepaymentsc tosuppliersforthegoods,andthetransaction
costs t: p = r -c -t.Ina competitive environment, since the cost of goods is exoge-
nous,andalsothetransactioncostsareindependentofsize,thena¨?vecommunitydesign
would aim for the largest possible community, to maximize revenues, and to amortize
the transaction costs over the largest possible membership base. In fact, the largest pos- siblecommuntiyisrarelytheoptimum,becausethesizeimpactsthecompositionofthe
community.Acommunitydoesnotchooseitsmembersrandomly,butselectsthosethat aremostrelevanttothethemeofthecommunity,orinotherwords,thosewhoarewilling topaythemostforthegoodsandservicesofferedbythecommunity.ConseDESIGNANDIMPLEMENTA TIONOFELECTRONIC COMMUNITIES 171
effective reservation price of the community members decreases as the community size increases, since the community has to accept lower paying members to the community. Themembershipfeesaredeterminedbythereservationpriceofthelowestpayingmem- bersofthecommunity,sinceotherwisethosenewestmembersofthecommunitywould
not join. Even a price discrimination scheme, such as the subsidy system discussed in
Section 3 would result in a reduction of the average reservation price of the commu-
nity as the commmunity size increases, and lower paying members are admitted. This fundamental problem with size is a direct result of the increasing heterogeneity of the community with increasing size. Consequently, the optimum community size is deter-
mined by a trade off between the larger savings from transaction costs, and the smaller revenuesfrom amoreheterogeneouscommunity,asthecommunity sizeincreases. Considerfourconsumerswithreservationprices4,7,8,and9forasingleproduct whoseacquisitioncosttothecommunityis2perunit,andthetransactioncostis6.The
community operator tries to set the membership fee optimally, which determines the
optimum community size by admitting all those whose reservation prices are above the membership fee. The optimum membership fee for this community would be 7, with communitysize 3 as showninthetable below.
Membership fee community size revenues cost ofgoods transaction cost profit.
4416 86 2
73 21 6 6 9 (optimum)
8216 46 6
91 926 1
Now consider the same four consumers with two products. The reservation prices
are 4, 7, 8, and 9 for the first product, and 2, 2, 4, and 8 for the second, and the total reservationpricesforthebundleare6,9,12,17.Thecostofacquiringthethebundleis assumedtobe4,andthetransactioncostremains6.Theoptimumcommunitymember-
ship fee will be 12 with the resulting community size 2 for the bundle size 2, as shown in the table below.
Membership fee community size revenues cost ofgoods transaction cost profit.
6424 16 6 2
9327 12 6 9
12 2 24 8 6 10 (optimum)
17 1 17 4 6 7
Finally, consider the same consumers with a bundle of three products, where the reservation prices are 4, 7, 8, 9 for the first, 2, 2, 4, 8 for the second, and 0, 1, 2, 6 for thethird,withtotalsof6,10,14,23.Thecostofthebundleis6,andthet172 ORMAN
remains6.Theoptimumcommunitymembershipfeewillbe23withcommunitysize1
forthe bundle size3, asshown in thefollowing table:
Membership fee community size revenues cost ofgoods transaction cost profit.
6424 24 6 –6
10 3 30 186 6
14 2 28 126 10
23 1 23 6 6 11 (optimum) Itisnotacoincidencethatthereisaninverserelationshipbetweenthecommunity
size and the bundle size for the optimum communities. Intuitively, this result follows fromtheexistenceofanoptimumheterogeneitywithinacommunity.Thatheterogeneity
or variance within a community can be achieved by increasing the community size or thebundlesize,orinotherwordsincreasingonerequiresdecreasingtheothertostayat theoptimumlevelofvariance.Anotherintuitiveexplanationisthetendencyofbundling toreducethevarianceofreservationpricesoverthewholepopulation,andclusterthem around the mean. This observation follows immediately from the central limit theorem. However,areductioninvarianceforthewholepopulationactuallyincreasesthevariance ifwerestrictourselvesonlytothetailsofthedistribution.Sincethecommunitydoesnot select its members randomly, but specifically from the upper tail of the distribution, it facesincreasingvariancewithbundling.Consequently,increasingbundlesizeleadstoa sharperdropinmembers’willingnesstopayasthecommunitysizeincreases,andhence
the optimum community size becomes smaller. We will now develop these arguments moreformally.
Let p be the profits, r revenues, c the cost of goods, and t is the transaction cost.
p = r -c -t.Revenues are dependent on the membership price l and the size of the community s: r = ls. The membership price l is the lowest reservation price among members per product in the bundle, and it is determined by the community size s and the bundle size b. The decision variables for a community organizer are the community
size and the product bundle, and the membership price l is set at a level to attract that
size community to that bundle. For a small community with a small product bundle,
the membership price can be set high to attract only those that are most interested in thatproductbundle.Asthesizeofthecommunitygrows,thecommunitybecomesmore heterogeneous, and to attract lower paying members, the community has to lower its membership fee. However, the drop in membership fees are the steepest for smaller communities, and as the community grows the highest paying members are exhausted, 2 2
and the rate of drop flattens out. Consequently, ?l/?s = l < 0 and ? l/?s = l > 0.
Similarly,asthebundlesizebgrows,thereservationpriceforthebundlegrowssincethe valueofallitemsareassumedtobenonzero,butthegrowthrateisslowerasthebundle
grows, and the most desirable items for the community are exhausted. Consequently,
* 2 2 **
?l/?b = l > 0and? l/?b = l < 0.Onthecostside,normalizingcostswithrespect
to reservation prices eliminates the variance of absolute cost values, and we can safelyransactioncostquently,theDESIGNANDIMPLEMENTATIONOFELECTRONIC COMMUNITIES 173
assume that the cost of a bundle increases with the size of the bundle at a constant rate,
* 2 2 **
?c/?b = c > 0and? c/?b = c = 0, but the bundle cost is independent of the 2 2 communitysize,?c/?s = c = 0and? c/?l = l = 0.
Weknowfromdefinitionsthat p = ls-cs-t,andthecommunityoperatorneeds
to maximize profit p with respect to community size s and the bundle size b, resulting
in: p = l +l s -c-c s = 0whichimpliesthatl s = c-l istheoptimalitycondition
since p = l +l s +l -c -c s -c < 0forsmalls fromtheassumptionsabove.
* * * * *
Similarly, p = l s-c s = 0impliesthatl = c istheoptimalityconditionsince
** ** ** ** **
p = l s -c s < 0sincel < 0andc = 0fromassumptionsabove.
The two optimality conditions can be used to derive the optimum community size andtheoptimum bundlesize asshown graphicallyinfigure 6. Therecanbemultipleoptimumsolutions,sincecostisnotnecessarilyalinearfunc- tionofthebundlesize.Whentherearemultiplesolutions,thereisaninverserelationship
betweenthe bundle sizeand the communitysize alongtheefficientfrontier. *
The preceding analysis depends heavily on the computation of l and l , the price sensitivityofthecommunitywithrespecttocommunitysizeandthebundlesize.These
* *
Figure6. l = c condition is used to compute the optimum bundle size b1 in the first graph, and then l s = c - l condition is used in the second graph to compute the optimum community size s1 and the
optimum community membership feel1 fromthe given bundlecost c and bundle size b1.
Figure7. Theinverserelationshipbetweencommunitysizes andthebundlesizebisderivedwherethebold * *
arrow shows the increasing b values, and the bold curve shows the efficient frontier where l = c . These
curves follow from the assumption that the willingness to pay increases slower than the bundle cost as the
bundle size increases since communities select themostpreferreditems first for the bundle. variablescanbeestimatedfromthesizeofthepopulationbasesupportingacommunity
and the size of the product bundle relevant to that population base. In other words, the
ultimate potential size of the community, and the ultimate potential size of the product
bundle can be used. Assuming a uniform distribution of reservation prices within the
population allows reasonable estimates of the price sensitivity as the community size
and/orthebundlesizegrows.Potentialpopulationbaseismucheasiertoestimate.Some communitieshaveaverylargepopulationbase,butduetononcommercialnatureofthose communities, the potentially relevant product base is relatively small. A community of Catholics for example draws from a very large population base, but the product bundle designedspecificallyforCatholicsmaynotbeverylarge,becauseofthenoncommercial
nature of the community. A community of golfers or a community of young parents
on the other hand, may have a much larger potentially relevant product base. When the population base of a community or the potentially relevant product base is large, the
community is less price sensitive with respect to that variable, since there is a bigger
pool to exploit before the reservation prices drop significantly. The assumption of uni-
form distribution of reservation prices makes estimation of price sensitivity relatively
easy.
5. Implementation
A marketplace for communities and bundles is fundamentally different from markets thatsupport individual transactions. Thereare threemajorissues:
a. The design ofthe communities and theproduct bundlesas elaboratedinSection4.
b. The description and marketing of communities where individual consumers can find communities, evaluate their relevancetotheirneeds, andjointhem.
c. The description and marketing of product bundles where communities and product bundlescan find eachother,evaluatealternatives, andengagein transactions.
We have discussed the community design problem in considerable detail in this article. Thedesignofmarketplacesforproductbundles,andthepricingmechanismsforbundles haveattractedsomeattentioninrecentliterature[3,4,6–8].Marketshavebeendesigned
where static or dynamic pricing can be used to buy and sell bundles of goods. Bundle
markets are considerably more complex than individual item markets, since a bundle transactionisnotsimplyacollectionofindividualitemtransactions,butitisacollection ofconditionaltransactions.Eachtransactiontakesplaceconditionallydependingonthe successofothertransactions,sinceeitherthewholebundleisexchangedornoexchange
takesplace.Thedesignandimplementationofsuchmarketshavebeenstudiedelsewhere,
but has a direct impact on the interaction of communities and their respective product
bundles[6,7].
The remaining issue for the successful creation of communities is the description andmarketingofcommunitiestoconsumers.AcommunityisanabstractstrucDESIGNANDIMPLEME NTATIONOFELECTRONIC COMMUNITIES 175
requires an abstract description for the market place. There are three possible tools to
describe acommunity.
a. Itcanbedescribedasacollectionofproducts,i.e.aproductbundle.Thebundlemay befixedoritmayvaryovertime.Afixedbundlecancompletelydescribeacommunity asamereprocurerofthatbundle.Thisisthesimplestpossiblecommunity,although
the description may be tedious and difficult to process if a large number of products areinvolved.Ifthebundleisvariable,atentativeoracurrentbundlecanbeprovided, anditisusednotonlyasadescriptionofthecommunityasitstandsnow,butalsoasa predictoroffutureproductbundlestobedeliveredbythecommunity.Inthatrespect,a bundledescriptionissimilartoasubscriptionwherethefuturebundlesarepredicted
from the current bundle. A bundle of household appliances for example may be a fixedbundleofferedbythecommunitytoallmembers,oritmaybeavariablebundle
including service and future replacements. In the latter case, the future replacements
are predicted from the current bundle offered, and the community can also make
prediction easierbyprovidingservicecontractsandguarantees.
b. Acommunitycanbedescribedbyalistofdesiredmemberattributes.Suchanabstract descriptionwouldbeeasiertoprocessbyprospectivemembers,butitwouldalsoentail
more uncertainty, since the matching of member attributes to product bundles is not
a trivial process. A communit y of “single parents” for example would be relatively
easy to describe and market, and the prospective members would easily understand therelevantaudienceforthecommunity.However,therelevantproductbundlewould
be difficult to predict by relyingsolelyonthedescription ofmember attributes.
c. An effective third solution may be a combination of the last two approaches. An ab- stractdescriptionintermsofmemberattributescanbeusedasahighleveldescription ofacommunity,butthedescriptioncanbesupplementedwithadescriptionofproduct bundlesthathavebeendeliveredtothemembersinthepasttoreducetheuncertainty aboutthecommunity’sproductbundle.A“Singleparentsofinfants”communitythat
also lists as a product bundle “baby sitting services”, “easy to prepare baby foods”,
and “home delivered baby clothes” would be an example of a community using an
effective combinationof the twodescriptivetechniques.
Finally, a marketplace needs to provide a search mechanism for consumers to locate relevantcommunities,compareandcontrastthem,andevaluatethemforpossiblemem-
bership. The distributed nature of the modern electronic markets requires description techniquesthatareuniversal,extensible,andcompatiblewithavarietyofexistinginter-
nal systems. XML emerged as a standard for data description in this highly distributed
and diverse environment [1,14,16]. Although XML was designed to describe raw data
in terms of individual data attributes, its hierarchical structure is suitable for describing aggregatesandabstractionswithminormodifications,andthoseaggregatesandabstrac-
tions are the most critical tools for communities. A product bundle for example can be describedsimplybyadescriptivenametaggedasa
also be described in a similar fashion, by a descriptive name tagged as
and psychographic attributes can be attached to the community entity as its attributes,
asdistinctfromtheattributesofindividuals.XML’shierarchicalstructurelendsitselfto
such a distinction between aggregates and its components, although XML does not au- tomatically provide a means of inheritance of attributes from communities to members. Inheritancecanbeaccomplishedhowevereitheratthequerylevel,orwithminorexten-
sions to XML, as we will argue later. The description problem becomes more complex whenacombinationofproductbundlesandmembercharacteristicsareusedtodescribe communities, especially when product bundles and member characteristics vary over
time. XML has neither the tools to distinguish between different types of descriptions,
nor the features to represent time and historical data [1,14]. However, all of these prob- lemscanbeovercomewithminoradjustments,orbycreativeuseoftags[9].Considera
community of single parents of infants. It can be represented as an XML data structure withtheroot
the community, such as
with appropriate attributes attached to each, and possibly more subcomponents. There areseveral fundamental shortcomings.
a. There is no feature to link community attributes such as
such as age range act as integrity constraints on the individual attributes, and those integrityconstraintshavetobeimplementedseparatelyandtheirsemanticshavetobe builtintotheapplicationsoftware.XMLdoesnotprovideadvanceddatabasefeatures
suchas integrity constraints[1,9].
b. Although product attributes can be listed simply as XML attributes, there are no
standards for describing various product categories, and the descriptions and tags
used by one community may not be compatible with the descriptions and tags used
byothers.SuchsemanticinconsistencyisamajorproblemwithXMLwhichdoesnot
employ universal schemas, however there is considerable activity by many industry
groupsto develop industrystandards forproductdescriptions [14].ure,andc. There is a fundamental difficulty of linking various community characteristics to
product attributes. This is a major theoretical problem in understanding how certain consumercharacteristicsrelatetocertainproductcharacteristicsintermsofmatching andmeetingthoseneeds.Itisalsoamajortechnicalproblemofhowtorepresentthose semanticrelationshipsbetweenconsumerattributesandmatchingproductattributes.
XML is not a semantic modeling tool, and complex relationships among entities
cannot be represented without resorting to artificial constructs such as proxies and
duplicates [1]. Consequently, establishing relationships between communities and productscannoteasilybeautomatedeitherattheanalyticaloratthetechnicallevels, andwewillleavethemasmanualprocesses.Thedevelopmentofappropriateproduct
bundles for each community, and the description of those bundles in terms of their relationshiptocommunityattributesareleftasmanualprocessestobecarriedoutby communityoperators as part of the communitydesignprocess.
The community design, the identification of relevant product bundles, and effective de- scriptionandmarketingofthecommunityanditsproductbundlearecomplexprocesses,
especially when one considers the number of all possible communities and all possible productbundles,evenforanarrowlyspecifiedniche.Theproblemisexponentiallymore
complex than matching individual consumers and individual products, since the num-
ber of all possible communities and the number of all possible bundles are exponential
functions of the number of individual consumers and individual products respectively. However,thiscombinatorialproblemcanbesimplifiedconsiderablybyconsideringnatu- rallyhierarchicalstructureofcommunitiesandbundles,andusinginheritancetechniques
to reuse community attributes and product bundles. A simple example is a hierarchy of communities:
Sinceasingleparentisaspecializationofaparent,theattributes,descriptions,andprod- uctbundlesofparentscommunitycanbeinheritedbysingleparentscommunity.Sucha hierarchicalstructureamongcommunitiescansignificantlysimplifycommunitydesign andproductselectionsincetheexpertisedevelopedwithinacommunitycanbeinherited
and easily reused in all of its subcommunities. If the operator of the parents commu- nityspecializedinproductsandservicesrelevanttoallparents,andmakethatexpertise
available to its subcommunities, then the development of a single parents community
would be significantly simplified allowing the operator of that community to specialize intheproductsandservicesrelevantonlytothatsubsegment.Similarly,attheindividual memberlevel,allmembersofthesingleparentscommunityareautomaticallymembers oftheparentscommunity,therebypopulatingtheparentscommunity,andautomatically inheritingtheattributesandbundlesrelevanttoparents,significantlyincreasingthesize oftheproductbundleavailabletothem.Suchinheritanceandaggregationarenotreadily availableintheXMLtoolset.Consequently,asearchforcommunitiesforsingleparents would not automatically include information about its supercommunities, such as the
parents community, nor would it include in its product bundle all the products inher-
ited from its supercommunities. To accommodate these features, XML descriptions of communities would have to be expanded to include attributes that explicitly list all of itssupercommunities.Atypicalexamplewouldusethetag
describe the singleparentscommunity.
A search for all supercommunites of a community and their product bundles would
require a recursive search, and once again XML query languages such as XML QL do notprovidegeneralrecursion.OnceagainXMLhastobeextendedtoaccommodatesuch
searches for communities. One possibility is using Extended Stylesheet language XSL whichdoesprovideforlimitedrecursion.WithoutgettingintodetailsofXSL,itsuffices
to point out that XSL provides templates that are used to search for all data that fit the template.TemplatesarepathsonXMLhierarchies,andallpathsthatfitthetemplateare
returned.Specifically,XSLprovidesforwildcardoption*thatfitsallsubpaths,andthat optioncanbeusedforlimitedrecursionontheXMLhierarchies.Inourexample,tofind
all supercommunities of the single parents community would require a template path thatstartsatsingleparentsandendatasupercommunitybutwouldallowanynumberof supercommunities in between. That template would return all supercommunities of the
single parentscommunity,as shown below:
Similarly,aggregateproductbundlesofallsupercommunitiescanbeobtainedbyanXSL
query with the following templates where the first tempate returns the products of the singleparentscommunity,andthesecondreturnstheproductsofallofitssupercommu-
nities:
6. Conclusions
Electronic communities have the potential to organize consumers in novel ways and to
create new marketplaces. There are significant benefits to communities such as the in- creasingbargainingpowerforconsumers,andthereductionoftransactioncostsforboth
consumers and suppliers. However, these benefits are not automatic, and the optimum DESIGNANDIMPLEMENTATIONOFELECTRONIC COMMUNITIES 179
design and implementation of communities are critical to their commercial success. Randomcollectionsofconsumersarenotlikelytobeeconomicallyviablecommunities; theywouldbedifficulttodescribetothemarketplaceandattractnewmembers;andthey wouldbedifficulttoimplementinadistributedenvironmentwhereaconciseandconsis-
tent description of the community to all constituencies is important. Successful design
requires a careful computation of the optimum community: its desired membership, its optimumsize,andtheproductbundleofferedtoit.Italsorequiresanabstractdescription
of the community in terms of product bundles and member attributes, and even possi-
bly their time dependence. New XML tools are needed to describe such aggregates and abstractionstoallow communities to participateindistributed electronicmarkets.
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