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SørgardKonkurransestrategi - 20031 Business strategies in the New Economy New What is New? business models A need for new business models? eCommerce Strategic.

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Presentation on theme: "SørgardKonkurransestrategi - 20031 Business strategies in the New Economy New What is New? business models A need for new business models? eCommerce Strategic."— Presentation transcript:

1 SørgardKonkurransestrategi - 20031 Business strategies in the New Economy New What is New? business models A need for new business models? eCommerce Strategic behaviour in eCommerce Kilde: Hjemmeside til Lars Sørgard (2003), Konkurransestrategi, Fagbokforlaget

2 SørgardKonkurransestrategi - 20032 New What is New? ICT Emergence of a new industry – ICT Convergence Microsoft, …. Internet The growth of the Internet Exchange of information Electronic commerce

3 SørgardKonkurransestrategi - 20033 New business models, or..? strategy From a text book in strategy : ’E-retailers are perhaps utilizing the most revolutionary and unothodox business model. A number of ’e-tailers’ sell products at cost (or below) and make money by selling advertising on the merchant’s web side’ Loss Leader But this is a traditional Loss Leader strategy loss leaders Grocery stores sell loss leaders to attract consumers

4 SørgardKonkurransestrategi - 20034 New technology, and … ? Shapiro and Varian (1998), Information Rules: ’Technology changes. Economic laws do not’ characteristics industriesNew Economy BUT: Special characteristics for the industries in the New Economy

5 SørgardKonkurransestrategi - 20035 Characteristics in the New Economy Network externalities Information goods Complementarities High fixed costs, (almost) zero marg. cost Durable goods R&D intensive …..

6 SørgardKonkurransestrategi - 20036 E-commerce - fierce competition? Consumers are better informed Can easily find the low price product Alternative distribution channels as shop-bots E-shops that compare prices Low priceslow brand loyalty  Low prices and low brand loyalty?

7 SørgardKonkurransestrategi - 20037 A business view: “ The Internet is a nearly perfect market because information is instantaneous and buyers can compare the offerings of sellers worldwide. The result is fierce price competition, dwindling product differentiation, and vanishing brand loyalty.” — Robert Kuttner, Business Week 1998 Why, then, high stock values on firms from the outset?

8 SørgardKonkurransestrategi - 20038 An empirical study Brynjolfsson and Smith (2000), ’Frictionless commerce? A comparison of Internet and Conventional Retailers’, Management Science. 20 Books and 20 CDs in the US 98-00 16 Internet outlets and 16 trad. outlets 12000 price observations

9 SørgardKonkurransestrategi - 20039 Empirical study –price changes We expect low menu costs on the Internet Low cost associated with price changes They find that Internet retailers make smaller smaller price changes and more price changes

10 SørgardKonkurransestrategi - 200310 Empirical study – price changes

11 SørgardKonkurransestrategi - 200311 Empirical study – price dispersion We expect more fierce competition and then less price dispersion on Internet They find slightly more price dispersion on Internet But price dispersion depends on the measures employed

12 SørgardKonkurransestrategi - 200312 Price dispersion Kernel Density Plots on De-meaned Price Data — Books

13 SørgardKonkurransestrategi - 200313 Vanishing brand loyalty.. ? Amazon 75-85% market share in books Prices can be 40% higher than lowest market prices ( Prices and services as and, but 10x market share

14 SørgardKonkurransestrategi - 200314 Why brand loyalty? Personalised advertising Amazon Amazon: ’Hello, Lars Sorgard. We have recommendations for you’ Trust separation Spatial and temporal separation between buyers and sellers Awareness and convenience 40% visit less than 10 sites/month YAHOO YAHOO lists 7000 book sellers

15 SørgardKonkurransestrategi - 200315 Price discrimination Versioning Sells different versions with different qualities The consumer can choose Self selection Serves different consumers with different versions

16 SørgardKonkurransestrategi - 200316 Versioning: Damaging products How to avoid cannibalization? Develops a high quality version ’Damages’ it to make a low quality version IBM printer Mathematica software

17 SørgardKonkurransestrategi - 200317 Lower prices in eCommerce? YES Some studies: YES NO Other studies: NO Why may we observe higher prices? More information  quick price response Less incentives to cut prices  Larger potential for price collusion?

18 SørgardKonkurransestrategi - 200318 Collude or not on Internet? Collude Time Profits Deviate Compete

19 SørgardKonkurransestrategi - 200319 Shopbots Picks the producer with the lowest price Leads to price sensitive consumers  Bertrand-like competition? Low price firm wins the market  Price close to marginal costs at least in these cases?

20 SørgardKonkurransestrategi - 200320 Shopbots – empirical study Ellison and Ellison (2001), ’Search, Obfuscation, and Price Elasticities on the Internet’. – – price comparisons Investigates three different memory modules 128MB PC100 LOW quality 128MB PC133 MEDIUM quality Abit KA7HIGH quality

21 SørgardKonkurransestrategi - 200321 Estimates of price elasticitities QUALITY LOWMEDIUMHIGH PRICE PLPL PMPM PHPH - 51.8*-25.2*-19.0* - 6.6*- 0.3 0.4 -1.5-8.6*

22 SørgardKonkurransestrategi - 200322 Some results Own price elasticity extremely high for low quality (- 51.8) Suggests fierce competition? increase Lower price on low quality results in an increase in medium and high quality sales Opposite of what we expect? attract consumers  Low price of low quality to attract consumers to its own site?

23 SørgardKonkurransestrategi - 200323 obfuscation strategy An obfuscation strategy You click on the low price product Then you are warned Long delivery time Not recommended for, say, Windows  Some go for medium or high quality BUT: Many still choose low quality Stuck with price sensitive consumers?

24 SørgardKonkurransestrategi - 200324 Long run equilibrium entryexitmergers acquisitions We observe entry and exit, mergers & acquisitions for Vigorous competition for markets?  Where will it end?

25 SørgardKonkurransestrategi - 200325 Exit for traditional retailers? They have a competitive advantage in traditional products (’physical’ products) Geographic location Logistics They, as well as the producers, responds by going online  Traditional retailers will continue to play an important role

26 SørgardKonkurransestrategi - 200326 Information goods Products that can be digitised (converted to bits) Music Video Text Will we observe a revolutionary change in the distribution system?

27 SørgardKonkurransestrategi - 200327 Market dominance? Some characteristics may lead to few firms Network externalities High fixed costs and low marginal costs R&D intensive – endogenous investments  We now observe the battle for market shares to win the market?

28 SørgardKonkurransestrategi - 200328 Dynamics - speculation some Varian’s prediction for some industries: ( Fierce price competition from the start Some firms are forced to exit Remaining firms succeeds in increasing prices?

29 SørgardKonkurransestrategi - 200329 Example ToysRus Amazon A joint venture between ToysRus and Amazon in August 2000 eToy eToy responded: ’This is great news for us. Last year we had half a dozen rivals. Now our two remaining rivals (ToysRus and are merging into one’ bankruptcy March 7, 2001: eToy filed for bankruptcy

30 SørgardKonkurransestrategi - 200330 Reshaping competition policy? Reorientation of Merger policy and test for predation? Dynamic competition more important than short run price competition? Could the important question be: Is entry by drastic innovation realistic?

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