Download ELC 498 Capturing Value

ELC 498
DAY 4
Capturing Value:
Market Structure and Competition
Agenda
Questions??
 3rd Perspective
 Capturing Value: Market Structure and
Competition

4 Perspectives
1.
2.
3.
4.
Technological Drivers Of Change
Creating Value: Economics Of Internetbased Commerce
Capturing Value: Market Structure And
Competition
Creating And Capturing Value In The
Supply Chain
Overview
Capturing value is all about “who wins” in the
economic markets
 Intense competition creates value for
consumers
 Different Industries have different market
structures




Horizontal (chap 3)
Vertical (chap 4)
Of particular interest is markets that
demonstrate DSIR (demand side increasing
returns)
Conventional Factors

Determine market structure

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Number of firms
Size distribution of firms
Nature of competitive strategies
What is the optimum size for a firm in a given market?

Economies of scale

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Low Barriers to entry


Big live … small die off
Many new entrants
Bottom line

What determines increasing returns (size, experience,
technology) determines market structure
The eCommerce market

Increasing returns are more affected by
distribution than manufacturing
1.
2.
3.

Low barrier to entry



Design and development of website
Ordering process
Fulfillment and logistics
Low cash needs
Ability to outsource tech
Results : Many (too many) entrants into the
marketplace
Increasing returns?

4 Problems (not obvious)
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Customer service is harder and more expensive for
eCommerce
Certain business models have high organizational costs
While ecommerce may reduce some transactional costs;
larger reductions can be realized by larger infrastructures (i.e.
centralized inventories
Driving traffic to the website can be difficult and expensive


High CAC and branding costs
The strong get stronger and the weak perish


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Incumbency advantage
Experience effects
Brand building
eCommerce markets

Information is also subject to increasing returns

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Consumption does not effect volume or value
Encyclopedia knowledge creates an incumbency advantage

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Positive feedback model

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Word of mouth (mouse)
Experience branding
Future results (oligopoly plus)

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Google, cnet, wikiopedia
Few large players
Many fringe firms
We are not there yet but are well on our way

Failure to reach critical mass can lead to death spirals
Demand side increasing returns
(DSIR)
The product’s or service’s benefits to
each user increases with the number of
other users
 Creates a Winner take all market
 2 sources of DISR

Compatibility
 Network effects

Compatibility effects

Computer programs and document
formats

Microsoft Word vs. WordPerfect
VHS and Beta tapes
 BluRay and HD DVD
 Standardization benefits

Open standards
 De facto standards

Network effects (full mesh)
A
B
D
C
N(N-1) ~ N2
Network effects (partial mesh)
A
vv
X
B
Y
C
Network effects (intermediary)
A
A
A
Intermediary
A
A
A
Network Effect (clearing house)
A
F
B
Clearing
House
E
C
D
eCommerce DSIR
E-mail
 IM
 C2C auctions
 Peer to peer networks
 Clearing houses and payment systems

DSIR and Market structure
Size installed base determines user
acceptance
 High Switching cost deters user from
switching between substitute products
 Players in a Markets that has large
installed base and high switching cost
tends towards a winner take all market
structure


“There can be only one”
DSIR feed back
Technology has the
largest # of users
Technology is attractive
to new users
Installed base
grows
Technology gets larger
Share of new purchases
DSIR example strategies
Community building
 Product reviews
 Get big fast


Lower cost – free?
Co-location
 Brand building

Competition

Many factors
Highly concentrated industries
 Low switching costs on the web


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Everyone is a few clicks away
Lower search costs
High competition should lead to price
convergence

Local gas prices
Contestable markets
New firm can enter market easily
 New (or existing) firm can gain market by
offering competitive pricing
 Contestable markets should tend to the
“law of one price”
 One would think that eCommerce is a
contestable market

Price reality check

Price dispersion for online products is high
(~30%)
 Some is due to introductory pricing


Some is due to electronics markets not
reaching equilibrium (yet)


Gain DSIR attributes
Too early to tell
eCommerce does not eliminate all sources of
differentiation


Quality, service & trust
Site composition
Online vs. off line
Competitive advantage

Online


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Low cost leader
Knowledge of customer
behavior ->
personalization
Create new CA
Product differentiation

Offline



Low cost leader
Leverage existing CA
Price (value)
differentiation
Capturing value through pricing

eCommerce brings

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Pricing that can be changed dynamically
Pricing that can be tailored to individual buyers
Buyers can negotiate pricing
Groups of buyers can determine pricing
Auctions are easy
Ecommerce companies must be able to
charge customers something approximating
what the individual is willing to pay
Problems with fixed pricing


All products marginal costs
Fixed price assumes that the price exceeds
marginal cost by a certain factor
 Fixed pricing assumes that all buyers have
same willingness to pay

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There may be consumers they would be willing to
pay for the product
There may be consumers that are willing to pay
mire than the marginal cost but less than the fixed
cost
What happens if the marginal cost decrease
as volume of sales increases?
Problems with dynamic pricing

Requires knowledge of consumer
Some consumer remain anonymous
 Dichotomy of buyers having more product
knowledge while supplier have more
consumer knowledge
 Acquisition and Storage of consumer data is
controversial


Dynamic pricing my be illegal
Dynamic pricing examples

Group discount purchasing

Co-op
Auctions (forward and reverse)
 Coupons and loyalty discounts

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Amazon charged existing customer more
than new customers
Revenue management systems

Airline and hotels
Summary
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Online markets have greater variety than offline
efficiency matters (on-line and off-line)
Some on-line markets are fragmented, others
are concentrated
DSIR is an important consideration
Low Barriers to entry created fluidity on the
market (Incumbents are unable to entrench)
Market niches be less competitive
There will be many innovative pricing schemes
in future eCommerce markets