Economic Aspects Flashcards
What’s new in E-Commerce
Distribution Channels:
- Multi-channel
- channel migration (RoPo e.g.)
Customer Management:
- Detailed information on customers
- Proximity with customers (SoLoMo!)
Revenue Sources:
- Information on price and dynamic pricing
- various new revenue models (freemium, subscriptions…)
- Longtail phenomenon
Industry Value Chain:
- Disintermediation (cut out the middle man)
- Network effects
- Reintermediation
Multi-Channel Strategies
Different channels (offline, website, mobile) and different stages for shopping (browse, search & research, buy and pay, shipping, customer service & returns)
-> Each step can happen on different channels! e.g. RoPo
Showroom Strategy
- let users try products offline and finalise transaction online
Benefits:
- no inventory at stores
- no check-out equipment & system
- fewer salespeople
Impact:
- increased demand around showroom by 10% (and direct online sales, too!)
- increased conversion rate
- reduced returns from direct online sales by 1%
Consumer Information & personalization
- Clickstream data analysis (e.g. Google Analytics)
- Social marketing (fb, twitter, LinkedIn)
- Mobile (LBS)
Groupon’s strategy
- Herding Effect via displaying cumulative sales
- eWoM via social media (encourage sharing)
- -> both effects are complements: herding(2) + fb(2) > 4
Unique Economic Principles of Ecommerce
- Positive Network Effects
- Many costs are minimal
- shelf cost
- search cost
- menu cost
- switch cost
- marginal cost of information goods
- Two-sided market effects
Positive network effects & Metcalfe’s Law
Metcalfe’s Law: the value of a network is proportional to the square of the number of connected nodes in the system
–> max[V(n)] = (n^2 - n) / 2
Positive network effects: the value of a product increases as the number of users increases
–> positive network externalities, e.g. fax machines, internet, social media, eBay
Implications of positive network effects
- “Winner takes all” or “Winner takes the most”
– QUERTY keyboard
– PDF files
– Facebook & Twitter
…
Long-tail phenomenon
an implication of minimal shelf cost:
- online stores can provide a much larger selection of products than physical stores can afford to stock
- revenue from less popular products in the long-tail might be substantial
- -> x-axis: #products offered
- -> y-axis: unit sales
Minimal Menu Cost
Prices of online products can be changed at a minimal cost (database entry)
- price experimentation possible
- easy to measure price elasticities
- dynamic pricing to maximise revenue!
elasticity = ∂Q/Q / ∂P/P (relative demand change per relative price change)
Minimal search and switch costs
- search costs of both buyers and sellers are minimal (price comparison is very easy)
- customers can easily switch to seller with lower prices
- Law of one price (LOP) applies on the internet –> all prices converge to the lowest one, even though some retailers try to compete on other dimensions
Minimal marginal cost of information goods
- online, price of information goods will be driven down to marginal cost, which is zero!
- that’s why there is so many free information goods
BUT:
- these firms hope for making money on
- advertising
- freemium effect (from free to premium users)
- capture large user base, become quasi-standard
- open-source mindset
Two-sided market
= Network markets comprised of two distinct categories of participants (e.g. guys & girls in nightclub, advertisers and searchers on Google, professionals & companies on LinkedIn…)
- sold quantity in market 1 is a function of q in market 2 (and vice versa)
- initially, there are profits to be made in both markets, but subsidising one market with a free good can increase demand and profits in the other market more than the losses in the first market!!!
=> SUBSIDISE THE MARKET THAT CREATES MORE SURPLUS IN THE CROSS MARKET (check cross-price elasticity and subsidise market with higher cross-price elasticity)
