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:
SørgardKonkurransestrategi 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
SørgardKonkurransestrategi New What is New? ICT Emergence of a new industry – ICT Convergence Microsoft, …. Internet The growth of the Internet Exchange of information Electronic commerce
SørgardKonkurransestrategi 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
SørgardKonkurransestrategi 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
SørgardKonkurransestrategi Characteristics in the New Economy Network externalities Information goods Complementarities High fixed costs, (almost) zero marg. cost Durable goods R&D intensive …..
SørgardKonkurransestrategi 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?
SørgardKonkurransestrategi 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 dot.com firms from the outset?
SørgardKonkurransestrategi 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 Internet outlets and 16 trad. outlets price observations
SørgardKonkurransestrategi 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
SørgardKonkurransestrategi Empirical study – price changes
SørgardKonkurransestrategi 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
SørgardKonkurransestrategi Price dispersion Kernel Density Plots on De-meaned Price Data — Books
SørgardKonkurransestrategi Vanishing brand loyalty.. ? Amazon 75-85% market share in books Prices can be 40% higher than lowest market prices (DealTime.com) Prices and services as BN.com and Borders.com, but 10x market share
SørgardKonkurransestrategi 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
SørgardKonkurransestrategi Price discrimination Versioning Sells different versions with different qualities The consumer can choose Self selection Serves different consumers with different versions
SørgardKonkurransestrategi Versioning: Damaging products How to avoid cannibalization? Develops a high quality version ’Damages’ it to make a low quality version IBM printer Mathematica software
SørgardKonkurransestrategi 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?
SørgardKonkurransestrategi Collude or not on Internet? Collude Time Profits Deviate Compete
SørgardKonkurransestrategi 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?
SørgardKonkurransestrategi Shopbots – empirical study Ellison and Ellison (2001), ’Search, Obfuscation, and Price Elasticities on the Internet’. Pricewatch.com – Pricewatch.com – price comparisons Investigates three different memory modules 128MB PC100 LOW quality 128MB PC133 MEDIUM quality Abit KA7HIGH quality
SørgardKonkurransestrategi 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?
SørgardKonkurransestrategi 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?
SørgardKonkurransestrategi Long run equilibrium entryexitmergers acquisitions We observe entry and exit, mergers & acquisitions for Vigorous competition for markets? Where will it end?
SørgardKonkurransestrategi 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
SørgardKonkurransestrategi Information goods Products that can be digitised (converted to bits) Music Video Text Will we observe a revolutionary change in the distribution system?
SørgardKonkurransestrategi 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?
SørgardKonkurransestrategi Dynamics - speculation some Varian’s prediction for some industries: (http://www.nytimes.com/library/financial/082400econ-scene.html)http://www.nytimes.com/library/financial/082400econ-scene.html Fierce price competition from the start Some firms are forced to exit Remaining firms succeeds in increasing prices?
SørgardKonkurransestrategi 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 Amazon.com) are merging into one’ bankruptcy March 7, 2001: eToy filed for bankruptcy
SørgardKonkurransestrategi 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?