The absolute value of the e-commerce market is growing as more firms sell online, including small and medium-sized enterprises (SMEs). The global e-commerce market reached $29 trillion in 2017, still largely dominated by business-to-business (B2B) transactions in absolute terms (UNCTAD 2019). However, our analysis (OECD 2019) shows that classical B2B sectors – including manufacturing and wholesale, which in 2016 accounted for 85% of e-commerce transactions in the US – now dominate the e-commerce landscape primarily because they account for larger shares of economic activity rather than because they engage more intensively in e-commerce. Moreover, between 2010 and 2017, accommodation and travel agency services saw the largest increases in terms of the share of e-commerce in total turnover,1 while the share of firms participating in e-commerce in the retail sector increased from 17% to 28%, more than in any other sector.
Digital technologies are enabling new business models and pushing the e-commerce frontier
Digital technologies, including artificial intelligence, blockchain, cloud computing, the Internet of Things and autonomous delivery devices (e.g. drones and robots), are enabling new business models and transforming the e-commerce landscape. Three e-commerce business models have been particularly transformative: business models that use online platforms, offer subscription services, and/or incorporate online-offline models. Online platforms match buyers and sellers, or consumers and content, facilitating e-commerce transactions domestically and across borders. Algorithms improve the likelihood of matches between buyers and sellers with positive effects on overall engagement (Fradkin 2017), while reputation mechanisms, essential to the arm’s length nature of e-commerce, play an important role in enabling trusted transactions between the multitude of active actors and products. Going forward, blockchain could play an important role in this regard (Chlu 2018).
Many e-commerce firms also use subscription business models, which enable the continuous provision of goods or services in exchange for recurring payments. From music-streaming services to subscriptions for bundled digital and physical products, these business models are becoming increasingly prevalent in the B2B space. Connected devices and smart contracts can also facilitate the purchase of products that need replenishment on a less regular basis by using sensors, software and network connections to make continuous or recurring purchases of tangible goods or services. For example, ‘smart’ appliances can automatically detect when they run low on essential supplies and automatically purchase new ones (Amazon 2017). Similarly, firms can benefit from lower marginal costs, reduced frictions and long-term recurring revenue flows.
While traditional firms are going digital, some firms that started online are now moving in the other direction. Firms increasingly combine both digital and physical components, using online-offline business models, and they view online environments as a seamless extension of the brick-and-mortar store and vice versa. On the one hand, traditional retailers make use of websites, mobile applications, self check-outs, electronic kiosks and smart shelf technology. On the other hand, online retailers are starting to build digitally enhanced physical stores, removing frictions from traditional purchase processes and offering the option to ‘click and collect’ (Goldfarb et al. 2015). Other firms blend online and offline elements to sell goods of variable quality (e.g. fruits and vegetables) or goods that require a specific fit that is otherwise difficult to judge online (e.g. bespoke clothing).
These business models increase the incentives for individuals to engage in e-commerce, even for those that prefer shopping in person, the major reason cited for not engaging in e-commerce in many advanced economies (OECD 2019). The trend is clear – the percentage of individuals in OECD countries buying online increased from 35% to 57% between 2009 and 2018, reaching over 80% in some countries. In the EU28, around 27% of individuals also engaged in cross-border purchases in 2018, far below potential but still a significant number given its small base.
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These business models, especially those that use online platforms, are also facilitating the participation of micro, small and medium-sized enterprises in e-commerce, offering fulfilment and other services for sellers and creating whole new marketplaces, including for transactions between peers (e.g., Airbnb). In 2017, more than one in five firms in OECD countries participated in e-commerce transactions, with the share reaching 40% in some countries. New evidence shows that firms using online tools to sell abroad attribute higher shares of revenues to exports and export to more countries, highlighting how e-commerce can increase cross-border trade (Figure 1).
Figure 1 Online versus offline exporters: Export intensity and number of export destinations
The e-commerce landscape is dynamic, but e-commerce divides persist
Despite the dynamism in e-commerce markets, important gaps remain with regard to e-commerce participation among firms and different groups of individuals. Large firms, for instance, are more than twice as likely as SMEs to participate in e-commerce in the majority of countries, and this gap has widened in many countries in absolute terms. Participation of SMEs in e-commerce is hampered by high costs, logistics and payment challenges, as well as a complex legal framework.
At the same time, e-commerce participation rates are markedly lower for older individuals, people with lower levels of education, as well as low-income households and those in rural areas. For example, individuals with high educational attainment are about 33% more likely to participate in e-commerce than those with a medium level of educational attainment and more than twice as likely as individuals with no or only a low level of education (Figure 2). Accordingly, individuals with low levels of education in 2018 still had e-commerce participation rates close to the aggregate participation rate of 2009 (35%). In several countries, a significant gender gap also persists.
Figure 2 Individuals with relatively more education engage more in e-commerce
Factors that inhibit the participation of many of these groups include low connectivity, a lack of ICT skills, low levels of trust or a lack of viable payment options – factors that can all be addressed by policy action. However, while the gender gap, and more recently also the urban-rural gap, have on average been decreasing over time, the absolute size of other gaps (e.g. in terms age, income and education) increased between 2009 and 2018. Policy measures – including targeted information campaigns, trust building initiatives, life-long training programmes, and public-private partnerships that target the participation of low-income households and those in rural areas – can help bridge such gaps.
Public policies can foster innovation in the e-commerce marketplace and increase inclusiveness
As digital transformation progresses, new business models will arise in ways that are difficult to predict. Business model innovations that make use of data and digital technologies often challenge traditional policy frameworks. There are two important ways in which policy can support e-commerce innovation and inclusiveness.
First, policy can remove regulatory barriers that preserve artificial distinctions, including between online and offline commerce. Technological changes have blurred the boundaries between online and offline activities, as well as between goods and services, which impacts policy frameworks that rely on these classical distinctions (e.g. the General Agreement on Trade in Services versus the General Agreement on Tariffs and Trade). For example, firms may use bricks-and-mortar stores as a point of collection, for the return of products bought online, or as a temporary storage facility before delivery. Existing licensing, permitting or zoning rules may not allow such functions, and in doing so constrain the development of e-commerce. At the same time, many existing road and sidewalk rules, many of which are local, stem from a time when the use of autonomous robots and unmanned aerial vehicles to deliver e-commerce products over the last mile was not anticipated.
Second, policy can encourage regulatory flexibility, experimentation and transparency. Policy experimentation can help ensure a firm’s ability to innovate while remaining within the spirit of existing laws. Outcome- or performance-based regulations, as well as regulatory sandboxes, can enable firms to test innovative products or services in a contained environment. In the e-commerce context, such sandboxes have been used to test the use of drones for delivery and digital payment mechanisms. At the same time, policies that focus on a particular type of e-commerce business model should be avoided. For example, while e-commerce business models that use online platforms are among the most prominent today, advances in digital technologies like distributed ledger technologies may diminish this role in the future. Increased transparency, including through better communication of existing regulations and their specific application to e-commerce, is another important step in reducing uncertainty for innovative e-commerce firms.