Reports. Agents will trigger huge increase in e-commerce

Citation

(1999), "Reports. Agents will trigger huge increase in e-commerce", European Business Review, Vol. 99 No. 6. https://doi.org/10.1108/ebr.1999.05499fab.006

Reports. Agents will trigger huge increase in e-commerce

Reports

Agents will trigger huge increase in e-commerce

Keywords Internet, Business, Shopping, Agents, Economics

The volume of electronic commerce - which already accounts for around $1.5 billion a year, following the phenomenal growth of the Internet - is likely to increase sharply because of advances in agent technology: applications that will allow us to delegate the authority to make decisions to software agents, programs that act independently on our behalf, significantly increasing our ability to use the Internet for business and comparison shopping. Writing in the latest Economic Journal, Dr Nir Vulkan of the University of Bristol explores the important economic implications of these agents.

Agents can perform interactive searches on behalf of their users. For example, an agent searching for airline tickets from virtual travel agencies on the Web can match preferred dates, price-range, class of travel and other features of the journey, without having to go back to its user at any given stage. Agents equipped with some negotiating skills can be used to schedule meetings, participate in online auctions and trade in financial markets. By delegating the search and matching activities to agents, the advantage of the Internet over traditional forms of business becomes significant.

Currently, only homogeneous goods like books and CDs are traded using agents. Such markets may become more competitive, but suppliers can block their sites from being interrogated by agents. Moreover, agents lower the search costs not only of consumers but also of suppliers wanting to find out what prices their rivals are charging. This makes it easier for firms to operate "trigger-price strategies", which may enable them to sustain high prices. It also makes it difficult for sellers to undercut each other secretly. Initial results suggest that prices will not fall significantly.

Agents can be used by marketing companies to create - and sell - consumer profiles. Host sites can interrogate visiting agents, similar to the questionnaires consumers are often asked to complete, thus collecting information and building up consumer profiles. This increasing usage of agents is likely to change the way revenues from advertising on the Web are distributed. Currently, most revenues come from banner advertising, charged on the basis of number of hits. But if most hits are from agents, then this measurement is clearly no longer suitable.

Agents can also be used to replicate the function of organisations whose main business is as intermediaries: the main reason why you visit a travel agent, for example, is because he can find out the most suitable deal for you relatively quickly, especially if he knows you. But if your agent can search and match your preferences directly, then this trip down the high street may no longer be necessary. The strength of human agents lies in their ability to provide exceptional access or superior information. These services will need to adapt to the new rules of the game or be eliminated.

Vulkan focuses on the interaction between users and agent, which is crucial to the success of agent-based applications. The user must learn to trust her agent to act in her best interests if she is to empower it to make decisions, especially financial decisions. This demands being able to express your preferences clearly, particularly when the desired object or service is "multidimensional" like hotel accommodations or travel arrangements. Of course, people are not always aware of their preferences nor are they able to express them in a mathematically consistent form. The burden of constructing preferences - from past behaviour and by asking the right questions - will therefore fall on the designers of agents.

Vulkan describes how economics and game theory can be used to design agent-based e-commerce systems. Economic theory looks at the relationship between market structures and efficiency of outcomes. The design of an automated market is no different from any other type of market. Companies that set up electronic markets are seeking to maximise their future profits through efficiency and competitiveness. Over the last three decades, rapid progress in game theory has brought the subject to an engineering-like state, where a large number of well understood mechanisms can be prescribed for participants with a given set of preferences. But until automated markets, even if the theoretical foundations were well understood, there was always some degree of unpredictability when these models are put to practice. These risks are significantly reduced in agent-based e-commerce systems:

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  These agents operate within the tight restrictions on the pre-specified protocol that controls the exchange of messages.

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  Unlike their human counterparts, software agents are "time-consistent" entities, which always choose optimally (given their computational ability, which is normally far greater than that of humans), much like textbook economic agents.

In short, economics and game theory are much more suitable for automated agents than they are for people. Vulkan describes the general metheds used to design such agent-based electronic markets, and some of the applications currently being developed, for example, online auctions and automated negotiations.

"Economic implications of agent technology and e-commerce", by Nir Vulkan is published in the February 1999 issue of the Economic Journal. Dr Vulkan is in the Economics Department at the University of Bristol. He can be contacted by telephone on +44 (0)117 928 8432; E-mail: vulkan@bristol.ac.uk; Web: fisher.ecn.bris.ac.uk/staff/ecnv/welcome.htm