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

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What is NewNew? Emergence of a new industry – ICTICT

• Convergence• Microsoft, ….

The growth of the InternetInternet• Exchange of information• Electronic commerce

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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

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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

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Characteristics in the New Economy Network externalities Information goods Complementarities High fixed costs, (almost) zero marg.

cost Durable goods R&D intensive …..

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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?

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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?

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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

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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

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Empirical study – price changes

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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

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Price dispersion

-6 -4 -2 0 2 4 6

Internet

Physical

Kernel Density Plots on De-meaned Price Data — Books

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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

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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

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Price discrimination Versioning

• Sells different versions with different qualities

• The consumer can choose Self selection Serves different consumers with

different versions

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Versioning: Damaging products How to avoid cannibalization?

Develops a high quality version ’Damages’ it to make a low quality

version

IBM printer Mathematica software

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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?

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Collude or not on Internet?

Collude

Time

Profits Deviate

Compete

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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?

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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

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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*

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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?

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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?

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Long run equilibrium We observe entryentry and exitexit,

mergersmergers & acquisitionsacquisitions

Vigorous competition forfor markets?

Where will it end?

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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

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Information goods Products that can be digitised

(converted to bits) Music Video Text

Will we observe a revolutionary change in the distribution system?

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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?

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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?

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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

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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?