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Competing Across Technology-Differentiated Channels: The Impact of Network Externalities and Switching Costs

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  • Siva Viswanathan

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    (Decision and Information Technologies Department, The Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742)

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    Abstract

    Technology-driven commerce channels, such as the Web, possess several unique features that differentiate them from traditional channels. The interaction between firms operating across these differentiated channels involves interesting competitive dynamics that cannot be captured by isolated models of electronic markets. This paper develops a stylized spatial differentiation model to examine the impact of differences in channel flexibility, network externalities, and switching costs on competition between online, traditional, and hybrid firms. A basic model highlighting the moderating influence of the hybrid firm on both channels is extended to account for differential network externalities and switching costs across the two channels. Our analysis indicates that while network effects as well as switching costs lead to the tipping of markets, such tipping occurs primarily due to the moderating effects of the competing channel. More importantly, with network effects an increased market share does not translate into higher profits. Contradictory to conventional wisdom, our results indicate that in a static market, consumers rather than firms, benefit from increasing network externalities, with competitive effects outweighing the surplus-extraction abilities of firms. Our results also highlight the importance of alternative revenue streams and provide insights for firms grappling with issues of channel choice as well as integration and divestiture.

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    File URL: http://dx.doi.org/10.1287/mnsc.1040.0338
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 51 (2005)
    Issue (Month): 3 (March)
    Pages: 483-496

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    Handle: RePEc:inm:ormnsc:v:51:y:2005:i:3:p:483-496

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    Related research

    Keywords: e-commerce; online retailing; network externalities; switching costs; game-theoretic models;

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    Cited by:
    1. Dou, Wenyu & Ghose, Sanjoy, 2006. "A dynamic nonlinear model of online retail competition using Cusp Catastrophe Theory," Journal of Business Research, Elsevier, vol. 59(7), pages 838-848, July.
    2. Stremersch, S. & Tellis, G.J. & Franses, Ph.H.B.F. & Binken, J.L.G., 2007. "Indirect Network Effects in New Product Growth," ERIM Report Series Research in Management ERS-2007-019-MKT, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.

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