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ELC 498

ELC 498. DAY 4 Capturing Value: Market Structure and Competition. Agenda. Questions?? 3 rd Perspective Capturing Value: Market Structure and Competition. 4 Perspectives. Technological Drivers Of Change Creating Value: Economics Of Internet-based Commerce

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ELC 498

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  1. ELC 498 DAY 4 Capturing Value: Market Structure and Competition

  2. Agenda • Questions?? • 3rd Perspective • Capturing Value: Market Structure and Competition

  3. 4 Perspectives • Technological Drivers Of Change • Creating Value: Economics Of Internet-based Commerce • Capturing Value: Market Structure And Competition • Creating And Capturing Value In The Supply Chain

  4. 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)

  5. Conventional Factors • Determine market structure • 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 • Big live … small die off • Low Barriers to entry • Many new entrants • Bottom line • What determines increasing returns (size, experience, technology) determines market structure

  6. The eCommerce market • Increasing returns are more affected by distribution than manufacturing • Design and development of website • Ordering process • Fulfillment and logistics • Low barrier to entry • Low cash needs • Ability to outsource tech • Results : Many (too many) entrants into the marketplace

  7. Increasing returns? • 4 Problems (not obvious) • 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 • Incumbency advantage • Experience effects • Brand building

  8. eCommerce markets • Information is also subject to increasing returns • Consumption does not effect volume or value • Encyclopedia knowledge creates an incumbency advantage • Google, cnet, wikiopedia • Positive feedback model • Word of mouth (mouse) • Experience branding • Future results (oligopoly plus) • 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

  9. 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

  10. 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

  11. Network effects (full mesh)

  12. Network effects (partial mesh)

  13. Network effects (intermediary)

  14. Network Effect (clearing house)

  15. eCommerce DSIR • E-mail • IM • C2C auctions • Peer to peer networks • Clearing houses and payment systems

  16. 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”

  17. DSIR feed back

  18. DSIR example strategies • Community building • Product reviews • Get big fast • Lower cost – free? • Co-location • Brand building

  19. Competition • Many factors • Highly concentrated industries • Low switching costs on the web • Everyone is a few clicks away • Lower search costs • High competition should lead to price convergence • Local gas prices

  20. 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

  21. Price reality check • Price dispersion for online products is high (~30%) • Some is due to introductory pricing • Gain DSIR attributes • Some is due to electronics markets not reaching equilibrium (yet) • Too early to tell • eCommerce does not eliminate all sources of differentiation • Quality, service & trust • Site composition

  22. Online Low cost leader Knowledge of customer behavior -> personalization Create new CA Product differentiation Offline Low cost leader Leverage existing CA Price (value) differentiation Online vs. off line Competitive advantage

  23. Capturing value through pricing • eCommerce brings • 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

  24. 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 • 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?

  25. 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

  26. Dynamic pricing examples • Group discount purchasing • Co-op • Auctions (forward and reverse) • Coupons and loyalty discounts • Amazon charged existing customer more than new customers • Revenue management systems • Airline and hotels

  27. Summary • Online markets have greater variety than off-line • 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

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