Explaining variations in the use of the Internet to support inter-organizational exchange: The case of the recycling industry

Internet tools, including auctions and other forms of electronic market mechanisms, can reduce transaction costs in inter-organizational exchange, such as those incurred during search and price discovery. Based on these advantages, many studies grounded in transaction cost economics predicted a high use of brokerage-like Internet tools such as Web-based auctions within business-to-business trading. Curiously, the usage of these tools is low in many industrial sectors, while the use of communication-like Internet tools (e.g., email) is high. These variations suggest that a transaction-cost theory approach may not fully explain why firms use particular Internet tools to coordinate transactions. This study develops a framework that complements the underlying antecedents of the use of Internet tools derived from transaction cost theory with additional factors rooted in social, relational and evolutionary aspects of inter-organizational behavior.;Exploratory and confirmatory case studies are conducted on a group of firms in the recycling industry that process and wholesale non-ferrous scrap metal. This industry is selected because it is an industrial sector that suffers from high transaction costs and stands to benefit greatly from the use of Internet tools. Hence it is a suitable setting in which to investigate the factors that constrain and/or promote the use of Internet tools.;The findings show that most recyclable material wholesalers did, in fact, use the Internet to support scrap metal transactions and reduce transaction costs. However, this usage was for communication and information-seeking, rather than for more sophisticated trade support. Case study firms used online services to receive real-time price updates of commodity exchanges and subsequently reduce price uncertainty costs. Email was also widely used to, for example, exchange digital pictures, reducing the cost of assessing the quality of recyclable materials and the cost to resolve a buyer's complaint. In contrast, only a few wholesalers used a Web-based auction to sell low-grade scrap materials to mostly Asian buyers. Most of the firms in the study refrained from the use of Web-based auctions because auctions were regarded as tools jeopardizing existing business relationships and inter-organizational routines, which increased safeguarding costs.;The findings largely support the proposed framework, and provide a greater understanding of variations in the ways that firms use the Internet to support inter-organizational exchange. Previous studies underestimated the fact that Web-based auctions imply a radical new price discovery mechanism disrupting existing negotiations, relationships and routines, whereas the use of real-time data feed services and email complement existing ways of doing business. As a result, previous studies have overestimated the potential for industry-wide use and effects of brokerage-like tools, and underestimated the use and effects of communication-like tools.