Winner Take All: Competition, Strategy, and the Structure of Returns in the Internet Economy
In this paper, we develop an economic rationale for the following stylized fact: Web-based firms spend profligately on advertising and marketing and usually lose money. Our rationale is based on the winner-take-all structure of high fixed cost, low marginal cost, markets for information goods. This market structure ensures that market participation and investment policy are highly stochastic. Moreover, if a firm chooses to participate in a Web market, it is optimal to act very aggressively through saturation advertising. Although increases in advertising costs reduce the probability of entry, once the decision to enter is made, firm strategies are insensitive to advertising price. Consistent with empirical studies of the profitability of internet firms ( Hand, 2001), our model predicts returns that are highly positively skewed, that is, even the firms that survive the competition for market position have a small chance of huge gains combined with a large probability of very modest returns. In dynamic competition, firms weakened by early rounds are less likely to challenge in subsequent rounds. However, when a challenge is attempted, it is always aggressive. In addition, because large expenditures in the first period produce valuable strategic real options in later periods, which are treated as expenses using traditional accounting methodology, the financial valuation of Internet firms may actually be negatively related to performance when using standard accounting measures of profitability that fail to capitalize these strategic real options. Copyright Blackwell Publishing 2005.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 14 (2005)
Issue (Month): 1 (03)
|Contact details of provider:|| Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/|
|Order Information:||Web: http://www.blackwellpublishing.com/journal.asp?ref=1058-6407&site=1|
When requesting a correction, please mention this item's handle: RePEc:bla:jemstr:v:14:y:2005:i:1:p:141-164. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.