Kilde Hjemmeside til Lars Sørgard 2003 Konkurransestrategi Fagbokforlaget

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

What is New? n Emergence of a new industry – ICT • • n Convergence Microsoft, …. The growth of the Internet • • Sørgard Exchange of information Electronic commerce Konkurransestrategi - 2003 2

New business models, or. . ? From a text book in strategy: • n ’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 Leader strategy • Sørgard Grocery stores sell loss leaders to attract consumers Konkurransestrategi - 2003 3

New technology, and … ? Shapiro and Varian (1998), Information Rules: n n ’Technology changes. Economic laws do not’ BUT: Sørgard Special characteristics for the industries in the New Economy Konkurransestrategi - 2003 4

Characteristics in the New Economy n n n n Network externalities Information goods Complementarities High fixed costs, (almost) zero marg. cost Durable goods R&D intensive …. . Sørgard Konkurransestrategi - 2003 5

E-commerce - fierce competition? n Consumers are better informed • n Can easily find the low price product Alternative distribution channels as shop -bots • E-shops that compare prices Low prices and low brand loyalty? Sørgard Konkurransestrategi - 2003 6

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 n Why, then, high stock values on dot. com firms from the outset? Sørgard Konkurransestrategi - 2003 7

An empirical study n n 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 8

Empirical study –price changes n We expect low menu costs on the Internet n n Low cost associated with price changes They find that Internet retailers make n n Sørgard smaller price changes and more price changes Konkurransestrategi - 2003 9

Empirical study – price changes Sørgard Konkurransestrategi - 2003 10

Empirical study – price dispersion n 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 11

Price dispersion Kernel Density Plots on De-meaned Price Data — Books Sørgard Konkurransestrategi - 2003 12

Vanishing brand loyalty. . ? n n n Amazon 75 -85% market share in books Prices can be 40% higher than lowest market prices (Deal. Time. com) Prices and services as BN. com and Borders. com, but 10 x market share Sørgard Konkurransestrategi - 2003 13

Why brand loyalty? n Personalised advertising n Amazon: ’Hello, Lars Sorgard. We have n Trust n n recommendations for you’ Spatial and temporal separation between buyers and sellers Awareness and convenience n n Sørgard 40% visit less than 10 sites/month YAHOO lists 7000 book sellers Konkurransestrategi - 2003 14

Price discrimination n Versioning • • n n Sells different versions with different qualities The consumer can choose Self selection Serves different consumers with different versions Sørgard Konkurransestrategi - 2003 15

Versioning: Damaging products n How to avoid cannibalization? n n Develops a high quality version ’Damages’ it to make a low quality version IBM printer Mathematica software Sørgard Konkurransestrategi - 2003 16

Lower prices in e. Commerce? n Some studies: YES Other studies: NO n Why may we observe higher prices? n More information quick price response n Less incentives to cut prices Larger potential for price collusion? n Sørgard Konkurransestrategi - 2003 17

Collude or not on Internet? Profits Deviate Collude Compete Time Sørgard Konkurransestrategi - 2003 18

Shopbots n Picks the producer with the lowest price n n Leads to price sensitive consumers Bertrand-like competition? n Sørgard Low price firm wins the market Price close to marginal costs at least in these cases? Konkurransestrategi - 2003 19

Shopbots – empirical study n Ellison and Ellison (2001), ’Search, Obfuscation, and Price Elasticities on the Internet’. n Pricewatch. com – price comparisons n Investigates three different memory modules n n n Sørgard 128 MB PC 100 128 MB PC 133 Abit KA 7 LOW quality MEDIUM quality HIGH quality Konkurransestrategi - 2003 20

Estimates of price elasticitities QUALITY LOW - 51. 8* -25. 2* -19. 0* PM -1. 0 - 6. 6* - 0. 3 PH Sørgard HIGH PL PRICE MEDIUM 0. 4 -1. 5 -8. 6* Konkurransestrategi - 2003 21

Some results n Own price elasticity extremely high for low quality (- 51. 8) n n Suggests fierce competition? Lower price on low quality results in an increase in medium and high quality sales n Sørgard Opposite of what we expect? Low price of low quality to attract consumers to its own site? Konkurransestrategi - 2003 22

An obfuscation strategy n n You click on the low price product Then you are warned n n 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? Sørgard Konkurransestrategi - 2003 23

Long run equilibrium n We observe entry and exit, mergers & acquisitions n Vigorous competition for markets? Where will it end? Sørgard Konkurransestrategi - 2003 24

Exit for traditional retailers? n They have a competitive advantage in traditional products (’physical’ products) n n n Geographic location Logistics They, as well as the producers, responds by going online Sørgard Traditional retailers will continue to play an important role Konkurransestrategi - 2003 25

Information goods n Products that can be digitised (converted to bits) n n Music Video Text Will we observe a revolutionary change in the distribution system? Sørgard Konkurransestrategi - 2003 26

Market dominance? n Some characteristics may lead to few firms n n n Sørgard 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? Konkurransestrategi - 2003 27

Dynamics - speculation n Varian’s prediction for some industries: (http: //www. nytimes. com/library/financial/082400 econ-scene. html) n n n Fierce price competition from the start Some firms are forced to exit Remaining firms succeeds in increasing prices? Sørgard Konkurransestrategi - 2003 28

Example n n A joint venture between Toys. Rus and Amazon in August 2000 e. Toy responded: n n ’This is great news for us. Last year we had half a dozen rivals. Now our two remaining rivals (Toys. Rus and Amazon. com) are merging into one’ March 7, 2001: e. Toy filed for bankruptcy Sørgard Konkurransestrategi - 2003 29

Reshaping competition policy? n Reorientation of n n Merger policy and test for predation? Dynamic competition more important than short run price competition? Could the important question be: n Sørgard Is entry by drastic innovation realistic? Konkurransestrategi - 2003 30