SørgardKonkurransestrategi - 20031 Business strategies in the New Economy New What is New? business...
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Transcript of SørgardKonkurransestrategi - 20031 Business strategies in the New Economy New What is New? business...
Sørgard Konkurransestrategi - 2003 1
Business strategies in the New Economy
What is NewNew? A need for new business business modelsmodels? Strategic behaviour in eCommerceeCommerce
Kilde: Hjemmeside til Lars Sørgard (2003), Kilde: Hjemmeside til Lars Sørgard (2003), KonkurransestrategiKonkurransestrategi, Fagbokforlaget, Fagbokforlaget
Sørgard Konkurransestrategi - 2003 2
What is NewNew? Emergence of a new industry – ICTICT
• Convergence• Microsoft, ….
The growth of the InternetInternet• Exchange of information• Electronic commerce
Sørgard Konkurransestrategi - 2003 3
New business models, or ..?From a text book in strategystrategy:
• ’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’
But this is a traditional Loss LeaderLoss Leader strategy
• Grocery stores sell loss leadersloss leaders to attract consumers
Sørgard Konkurransestrategi - 2003 4
New technology, and … ?Shapiro and Varian (1998), Information Rules:
’Technology changes. Economic laws do not’
BUT: Special characteristicscharacteristics for the industriesindustries in the New New
EconomyEconomy
Sørgard Konkurransestrategi - 2003 5
Characteristics in the New Economy Network externalities Information goods Complementarities High fixed costs, (almost) zero marg.
cost Durable goods R&D intensive …..
Sørgard Konkurransestrategi - 2003 6
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 prices and low brand loyaltylow brand loyalty?
Sørgard Konkurransestrategi - 2003 7
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?
Sørgard Konkurransestrategi - 2003 8
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
Sørgard Konkurransestrategi - 2003 9
Empirical study –price changes We expect low menu costs on the
Internet Low cost associated with price changes
They find that Internet retailers make smallersmaller price changes and more price changes
Sørgard Konkurransestrategi - 2003 10
Empirical study – price changes
Sørgard Konkurransestrategi - 2003 11
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
Sørgard Konkurransestrategi - 2003 12
Price dispersion
-6 -4 -2 0 2 4 6
Internet
Physical
Kernel Density Plots on De-meaned Price Data — Books
Sørgard Konkurransestrategi - 2003 13
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
Sørgard Konkurransestrategi - 2003 14
Why brand loyalty? Personalised advertising
AmazonAmazon: ’Hello, Lars Sorgard. We have recommendations for you’
Trust Spatial and temporal separationseparation between
buyers and sellers Awareness and convenience
40% visit less than 10 sites/month YAHOOYAHOO lists 7000 book sellers
Sørgard Konkurransestrategi - 2003 15
Price discrimination Versioning
• Sells different versions with different qualities
• The consumer can choose Self selection Serves different consumers with
different versions
Sørgard Konkurransestrategi - 2003 16
Versioning: Damaging products How to avoid cannibalization?
Develops a high quality version ’Damages’ it to make a low quality
version
IBM printer Mathematica software
Sørgard Konkurransestrategi - 2003 17
Lower prices in eCommerce? Some studies: YESYES Other studies: NONO
Why may we observe higher prices? More information quick price response Less incentives to cut prices Larger potential for price collusion?
Sørgard Konkurransestrategi - 2003 18
Collude or not on Internet?
Collude
Time
Profits Deviate
Compete
Sørgard Konkurransestrategi - 2003 19
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?
Sørgard Konkurransestrategi - 2003 20
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 KA7 HIGH quality
Sørgard Konkurransestrategi - 2003 21
Estimates of price elasticitities
QUALITY
LOW MEDIUM HIGH
PRICE
PL
PM
PH
- 51.8* -25.2* -19.0*
-1.0 - 6.6* - 0.3
0.4 -1.5 -8.6*
Sørgard Konkurransestrategi - 2003 22
Some results Own price elasticity extremely high for
low quality (- 51.8) Suggests fierce competition?
Lower price on low quality results in an increaseincrease in medium and high quality sales Opposite of what we expect?
Low price of low quality to attract attract consumersconsumers to its own site?
Sørgard Konkurransestrategi - 2003 23
An obfuscation strategyobfuscation 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 qualityStuck with price sensitive
consumers?
Sørgard Konkurransestrategi - 2003 24
Long run equilibrium We observe entryentry and exitexit,
mergersmergers & acquisitionsacquisitions
Vigorous competition forfor markets?
Where will it end?
Sørgard Konkurransestrategi - 2003 25
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
Sørgard Konkurransestrategi - 2003 26
Information goods Products that can be digitised
(converted to bits) Music Video Text
Will we observe a revolutionary change in the distribution system?
Sørgard Konkurransestrategi - 2003 27
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?
Sørgard Konkurransestrategi - 2003 28
Dynamics - speculation Varian’s prediction for somesome
industries: (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?
Sørgard Konkurransestrategi - 2003 29
Example A joint venture between ToysRusToysRus and
AmazonAmazon in August 2000 eToyeToy 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’
March 7, 2001: eToy filed for bankruptcybankruptcy
Sørgard Konkurransestrategi - 2003 30
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?