Business to Business (B2B) markets have positively influenced the business community for a number of years now. Their impact on the economy is evident in several ways:

Transaction costs. Three cost areas are significantly reduced through the conduct of B2B eCommerce.

  • First is the reduction of search costs, as buyers need not go through multiple intermediaries to search for information about suppliers, products and prices as in a traditional supply chain. Internet is more efficient at gathering information, in terms of effort, time, and money spent. In B2B markets, buyers and sellers are gathered together into a single online trading community, reducing search costs even further.
  • Second is the reduction in the costs of processing transactions (e.g. invoices, purchase orders and payment schemes), as B2B allows for the automation of transaction processes and therefore, the quick implementation of the same compared to other channels (such as the telephone and fax).
  • Third, online processing improves inventory management and logistics.

Removing IntermediariesThrough B2B e-markets, suppliers are able to interact and transact directly with buyers, thereby eliminating intermediaries and distributors.

Transparency in pricing. – Among the more evident benefits of e-markets is the increase in price transparency.

  • The gathering of a large number of buyers and sellers in a single e-market reveals market price information and transaction processing to participants.
  • Increased price transparency has the effect of pulling down price differentials in the market.
  • Buyers are provided much more time to compare prices and make better buying decisions.
  • B2B e-markets also allow multiple buyers and sellers to participate in two-way or reverse auctions. In such environments, prices can be set through automatic matching of bids and offers.

Economies of scale and network effects. The rapid growth of B2B e-markets creates traditional supply-side, cost-based economies of scale. Furthermore, the bringing together of a significant number of buyers and sellers provides the demand-side economies of scale or network effects. Each additional incremental participant in the e-market creates value for all participants in the demand side. More participants form a critical mass, which is key in attracting more users to an e-market.

Business-to-government eCommerce, or B2G, is defined as commerce between companies and the public sector. The United States Government is the largest buyer in the world. The federal government spends over $300 billion dollars annually on various goods and services. The federal government is also under extreme pressure to save money wherever it can.

Although the federal government has taken advantage of some of the lessons learned by B2B markets, moving many of it processes and transactions to the Internet, it has not taken full advantage of web-based procurement or eMarketplaces. There are a few systems in place, GSA Advantage and DOD EMALL being the largest. But government e-procurement systems remain undeveloped and underutilized. Web-based purchasing policies increase the transparency of the procurement process and reduce the risk of irregularities. The federal government would be wise to use online marketplaces to take advantage of their enormous buying power and reduce prices across the board. The American taxpayer would be most appreciative.

What do you think? If you are an American taxpayer or involved in B2G, do you agree? Sound off in the comments section below.

This post was originally published in October 2011.