Competing Across Technology-Differentiated Channels: The Impact of Network Externalities and Switching Costs
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.
Volume (Year): 51 (2005)
Issue (Month): 3 (March)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Cooper, Thomas E, 1989. "Indirect Competition with Spatial Product Differentiation," Journal of Industrial Economics, Wiley Blackwell, vol. 37(3), pages 241-257, March.
- Wernerfelt, Birger, 1985. "Brand loyalty and user skills," Journal of Economic Behavior & Organization, Elsevier, vol. 6(4), pages 381-385, December.
- Economides, Nicholas, 1989. "Symmetric equilibrium existence and optimality in differentiated product markets," Journal of Economic Theory, Elsevier, vol. 47(1), pages 178-194, February.
- Paul Klemperer, 1995. "Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 515-539.
- Sridhar Balasubramanian, 1998. "Mail versus Mall: A Strategic Analysis of Competition between Direct Marketers and Conventional Retailers," Marketing Science, INFORMS, vol. 17(3), pages 181-195.
- J. Yannis Bakos, 1997. "Reducing Buyer Search Costs: Implications for Electronic Marketplaces," Management Science, INFORMS, vol. 43(12), pages 1676-1692, December.
- Paul Klemperer, 1987. "The Competitiveness of Markets with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 138-150, Spring.
- Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
- Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
- Erik Brynjolfsson & Michael D. Smith, 2000.
"Frictionless Commerce? A Comparison of Internet and Conventional Retailers,"
INFORMS, vol. 46(4), pages 563-585, April.
- Michael Smith & Erik Brynjolfsson, 1999. "Frictionless Commerce? A Comparison of Internet and Conventional Retailers," Computing in Economics and Finance 1999 1022, Society for Computational Economics.
- Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-841, August.
- Stanley M. Besen & Joseph Farrell, 1994. "Choosing How to Compete: Strategies and Tactics in Standardization," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 117-131, Spring.
When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:51:y:2005:i:3:p:483-496. 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: (Mirko Janc)
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.