E Market Strategy

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E Market Strategy Powered By Docstoc
					   Search Costs in the E-Market :
Equilibrium and Corporation Strategy



                  Jian CHEN, YinXia LIN
       Research Center for Contemporary Management
                   Tsinghua University
                  Beijing, 100084, China




                                                     1
                                 2




Contents

   l   Introduction
   l   Model Description
   l   Model Analysis
   l   Managerial Implications
   l   Conclusion
                                 3




Contents

   l   Introduction
   l   Model Description
   l   Model Analysis
   l   Managerial Implications
   l   Conclusion
                                                                     4




The Definition of E-Market
       An electronic marketplace is an inter-organizational
 information system that allows the participating buyers and
 sellers to exchange information about prices and product
 offerings.(Bakos, 1991)


      An e-market is a hub that brings multiple buyers together
 with multiple sellers. It creates values for members by providing
 a unified view of goods and services traded, along with various
 mechanisms to facilitate trade.(Boris,2001)
                                                                            5




The Global Development of E-market
l   According to Forrester, the online retail sales will hit $269 billion
    in 2005(Dykema, 2000).

        300
        250
        200
                                                    Retail
        150                                         Sale(Billion)
        100
         50
          0
              2000    2003    2005
                                                                               6




The E-Market in China
l    In   China,     E-Market     also
     develops at a very quick tempo.
     The establishment of 8848 B2C
     leads China into the phrase of E-
            s
     Market’ practical application.

l                        s
     According to CNNIC’ eleventh
     report of Chinese network
     development status,42.2 percent
                                            Therefore, E-Market has become
     of Chinese network users will
                                             an integral part of everyday life
     probably purchase online. And
                                            and it will also play a greater role
     24.7 percent will certainly buy
                                                      in the economy.
     online(CNNIC,2003).



    Note: CNNIC stands for China Internet Network Information Center
                                                                7




The Most Important Trait of E-market
l   A transaction process, which is a very important part
    of the market function, can be divided into three main
    steps: search, negotiate and distribution.

           Search        Negotiate      Distribution



l   The costs of negotiation and distribution in E-market are
    not very much different from those in traditional market.
    But in the search step, because of the convenience of
    searching on the internet, the cost during this step is
    much reduced. So one of the most important trait of e-
    market is reduced search cost.
                                                                                          8




     Consequences of Lower Search Cost
                                 s
                        •consumer’ surplus will be increased

    The lower                  s
                        •seller’ surplus will be decreased
   search cost
                        •The market will finally evolve into a frictionless state, that
                         is, the selling price is equal to the marginal cost
                                  Lower search cost                   Lower Price???
                                                t
              However, the empirical results don’always support it.
              For example:
Search cost
                Fabio Ancarani etc(2002) -- Italian E-market of CD and Book–not support
                Brynjolfsson (2000)--American E-market of CD and Book--support
                Lee, Ho Geun(1998)— Japanese E-market of Auto— not support
                Bailey(1998)---American E-market of CD and book— not support
                                                                            9




Empirical Results
Fabio(2002): Study on the book and CD categories of Italy market.
                      Price Level with shipping cost vs. Price Dispersion

        Price Level
                                      MultiChannel




                                                            Pure Play

                        Traditional


                                                               Price
                                                            Dispersion
                                                                    10




Empirical Results
Brynjolfsson and Smith(2000)
Research on the book and CD categories of America market.




   Prices for books and CDs sold on the Internet average 9–  16%
less than the identical items sold via conventional channels. The
mean price for books was $2.16 less and $2.58 less for CDs.
                                           11




Empirical Results
Lee, Ho Geun(1998)
Research on Japanese auto auction market
                                                                                                12


                               Search Theory
Concerned with the expenditures involved in the search process and it is the
reduction of such expenditures that makes e-market so attractive


   Previous Model                          The Definition of Search Cost


                        Use travel costs, which mainly refer to transportation fees, as
Hotelling, H(1929)
                        consumers’  search costs

Salop(1979)
Bakos, J.Yannis(1997)                      s
                        Improve Hotelling’ model and consider the influence of sellers on
Rajiv Lal(1999)         search costs in their models; but their definitions of search cost
Zettlemeyer(2000)                                          s
                        did not differ much from Hotelling’ in essence.


                        Divide search costs into two parts
                             • Systematic search cost (represented by variable t): the
                                cost of accessing a seller and negotiating the price, and it
                                is determined by the market. For example, the traffic cost
                                may be categorized as one kind of systematic search cost.
Our Model                    • Non-systematic search cost( represented by variable s ):
                                the cost of obtaining the specific information of seller, and
                                it could be determined by the sellers. For example, the
                                seller can utilize the layout of website to set some non-
                                systematic search cost on the consumers.
                                   13




The Evolution of Search Model

                 based model based
    Search model Searchon space
                  consumer behavior
 Traditional
      Hotelling
  Market
          Salop
                  Rajiv   Liang
  Electronic
   Market    Bakos   Zettelmeyer
                                 14




Contents

   l   Introduction
   l   Model Description
   l   Model Analysis
   l   Managerial Implications
   l   Conclusion
                                                                                     15




Model Description
  There are two sellers
1      The seller 1 represents the leader in the market
       The seller 2 represent the followers in the market
   Consumer
        Facing the choice of buying directly, searching at
2 the start, and returning the item or keeping the item
   after buying.
        The consumer does not know the exact utility of the
   product at the beginning until the buying or searching
   the item. But he does know the distribution pattern of it.
                                                                            Search
    Product
3                                                                           Model
        There is no difference of quality between the products of the
        two sellers, but there may be some non-quality differences,
        such as the appearance and the design of the products.

    Sellers
4
       Under certain return cost and systematic search cost, compete in a
    two-stage game. In the first stage, sellers set the non-systematic
    search cost; and in the second stage, under each combination of
    nonsystematic search cost, the sellers set their prices.
                                                       16




Model Illustration
                         Market

                                         Systematic
          Return cost
                                         search cost




                            Seller
                        Non-systematic
                         search cost



                             Price



                           Consumer
                        Buy

                  Keep Return         Search
                                     17




The Behaviors of Consumers
                    start
               Go to 1 Pass Go to 2
                (-t1)    0       (-t2)
 1st stage (*,u1) Search1 Buy2
        Buy1          (-s1)
     Keep1Return
      stage
 2nd(u1-p1)
          (-r1)       G
                   Buy1 o to 2 ......
                            Pass
                      (-t2) 0
 3rd stage(-t2) 2 (*,u1,u2)
            Go                 Simliar as
        Pass to Buy2 Search2 tree
        0                  (-s2) left
       Buy2 (-s2) Return
                   (u2-p2)Buy2 0
                    Keep2 (u1-p1-t1)
                      (-r2) Go/buy1
 4th stage Search2 (u2-p2)Pass
          (*,u1,u2)
     Keep2Buy2 (u1-p1-t1)
         Return0 Go/buy1
 5th (u2-p2) Pass Pass
      stage (u2-p2)
         (-r1)           0
                                 18




Contents

   l   Introduction
   l   Model Description
   l   Model Analysis
   l   Managerial Implications
   l   Conclusion
                                                                                        19




    The Variables in the Model
Name Range                  Description               Does consumer         Decision
                                                         know?              variable?
s1 , s 2   ∈ [0,1] Non-systematic search cost              Yes                Yes
                       of seller 1 and seller 2
p1 , p2    ∈ [ 0,1] Price of seller 1 and seller 2          Yes               Yes
                   Systematic search cost of                Yes                No
t1 ,t 2    ∈ [ 0,1]
                        seller 1 and seller 2
                   Return cost of seller 1 and              Yes                No
r1 , r2    ∈[0,1]
                               seller 2
                  Utility of seller 1 and seller 2     Only know the           No
u1 ,u 2 ∈[0,1]
                                                     distribution pattern
                                                      at the beginning
                                                                            20




Model Analysis
l   In simulation, the feasible set X ∈ [ 0,1] is approximated by a
                                 1 2        
    discrete set      X’( X ' =  0 , , ,L 1  ) ,   and N depends on the
                                 N N        
    required accuracy, e.g., N=100 or 10000).
l   Under each combination of nonsystematic search cost, the
    payoff matrix (in the next slide) is calculated out, based on which
    the Nash Equilibrium of prices can be obtained. After solving the
    problem of sub-game equilibrium, we can derive an overall
    payoff matrix of nonsystematic search costs. And the simulation
                            *' *'     *'   *'
    result of equilibrium (s1 , s2 , p1 , p2 ) is the Nash equilibrium of
    this overall matrix, which is approximate to the exact equilibrium.
       *         *    *
    ( s1 , s* , p1 , p2 )
            2
                                                                                                               21




Model Analysis
   Payoff Matrix under certain non-systematic search cost s
                       p20                      p21               LL                 p2N
  p10 (g1( p10, p20)£¬ ( p10, p20 )), (g1( p10, p21)£¬ ( p10, p21)), LL , (g1( p10, p2N )£¬ ( p10, p2N )) 
                        g2                            g2                 L                 g2
 p11 (g ( p p )£¬ ( p p )), (g ( p p )£¬ ( p p )),L L, (g ( p p )£¬ ( p p )) 
                                                                       L
       1 11, 20 g2 11, 20               1 11, 21 g2 11 21   ,               1 11, 2N      g2 11, 2N       
   M         M             M                 M            M            M       M               M          
   M                                                                                                      
             M             M                 M            M            M       M               M          
   M                                                                                                      
             M             M                 M            M            M       M               M          
   M                                                                                                      
              M             M                 M            M            M       M               M
   M                                                                                                      
             M             M                 M            M            M       M               M          
   M                                                                                                      
              M             M                 M            M            M       M               M
                                                                                                          
 p1N (g ( p p )£¬ ( p p )), (g ( p p )£¬ ( p p )), L L,(g ( p p )£¬ ( p p ))
                         g2 1N, 20                     g2 1N, 21        L                     g2 1N, 2N
       1 1N, 20                          1 1N, 21                             1 1N, 2N                    
          gi (⋅ , ⋅) = demand of seller i × price of seller i, i = 1,2
           pij ∈Χ' , i = 1,2; j = 0,1....N
                                                                                22




  Model Analysis
 The model uses two variables to describe the innate features of the
market:systematic search cost and return cost.
   It
  • is commonly assumed that the systematic search cost is less in an
  e-market than that in a conventional market .
  •Return cost is determined by the traits of the products. For products
  that are consumed quickly and with less value, the corresponding
  return costs are lower.

        We experiment on different combination of return costs and systematic
      search cost to analyze the impact of systematic search cost on the
      market equilibrium.
                                                                                                            23




When Return Cost Is Low
                  s
 Case 1 £ºSeller1’ systematic search cost is increased, while the
       s
seller2’ is zero.

                                                        Equilibrium Price

                     0.6
 Equilibrium price




                     0.5
                     0.4
                                                                                          Seller1's Price
                     0.3
                     0.2                                                                  Seller2's Price
                     0.1
                       0
                           0




                                                                                      1
                               0.1
                                      0.2
                                            0.3
                                                  0.4
                                                        0.5
                                                              0.6
                                                                    0.7
                                                                          0.8
                                                                                0.9
                                     Seller1's systematic search cost
                                           24




  When Return Cost Is Low
                       Profit
         300
         250
Profit




         200                         The seller1
         150                         profit
         100                         The seller2
                                     profit
         50
          0
                0 0 0.4 0 0.7 0.9
            0 0.1 .2 .3 0.5 .6 0.8 1
              seller1's systematic search cost
                                                                       25




When Return Cost Is Low
 700
 600                                              Consumer's surplus

 500
 400                                              The total search
 300                                              cost

 200
 100
                                                  Consumer net

  0
                                                  surplus


        0.2 0.4 0.6 0.8
    0 0.1 0.3 0.5 0.7 0.91                        Consumer's net
                                                  surplus+seller's
               Seller1's systematic search cost   surplus

Note:
        s                     s
Consumer’ net surplus=Consumer’ surplus-the total search cost
                                                          26




When Return Cost Is Low
l   Conclusion of Case 1

                     s
      If the seller1’ systematic search cost is higher
                       s,
    than the seller2’ it may lose the leadership in the
    market. On the other hand, with the systematic
    search cost increased, the surplus of consumers and
    sellers will be reduced.
                                                                                  27




 When Return Cost Is Low
  Case 2 £ºBoth sellers’systematic search costs are equally
increased.
                                            Equilibrium Price
       Equilibrium Price




                           0.6
                           0.5
                           0.4                                     The price of
                           0.3                                     seller1
                           0.2                                     The price of
                                                                   seller2
                           0.1
                             0
                                 0 0.10.20.30.40.50.60.70.80.9 1
                                     The systematic search cost


                                                           s
  The price of seller2 is no less than the price of seller1’
                                                                        28




When Return Cost Is Low

                                 Profit
          250
          200
          150
 Profit




          100
                                                     Seller1's profit

          50
                                                     Seller2's profit

           0
          0.1
          0.2
          0.3
          0.4
          0.5
          0.6
          0.7
          0.8
          0.9
           0




           1
                The systematic search cost


                                                          s
The profit of seller1 is no less than the price of seller2’
                                                                            29




 When Return Cost Is Low
                                Surplus
surplus


          800                                         Consumer's n
          600                                         surplus
          400                                         Consumers' n
          200                                             £«
                                                           the
                                                      surplus
           0                                          sellers' profit
          0.1
          0.2
          0.3
          0.4
          0.5
          0.6
          0.7
          0.8
          0.9
           0




           1
                The systematic search cost
  The total surplus which equals to the sum of consumers’    net surplus
and the sellers’profit, is non-increasing with the increase of the search
cost.
                                                              30




When Return Cost Is Low
l   Conclusion of Case 2
         As a leader in the market, seller1 will be in a
    relatively advantageous place while the two sellers
    set the same search cost. Secondly, just like the
    conclusion of case 1, the increase of search cost will
    reduce the social welfare. Finally, the price of seller
    1 is no higher than seller 2, which is in accordance
    with Carlson and McAfee (1983), that is, a seller sets
    a lower price when the cost of seller is relatively
    lower. In this case, this cost can be referred to the
    cost of reaching at the customer.
                                                                     31




The Managerial Insight of Case 1 and Case 2
 l   If seller 1’systematic search increases while seller 2’
     systematic search cost keeps the same, the equilibrium
     of the market will evolve into a state that benefits seller 2
     much.
 l   This result is meaningful. When the return cost is low,
     the market followers can resort to information technology
     to make up the loss caused by difficult search in
     conventional markets and use the sale pattern of B to C
     to make search easier for the consumers and increase
     the sale amount and the payoff, as well.
                                                                                                     32




When the Return Cost Is High
 Case 3 £º         s
            Seller1’ systematic search cost is increased, while the
       s
seller2’ is constant.
                            The comparison of case 3 and case 1

             0                                                    60
                  0   0.1        0.2       0.3        0.4   0.5

                                                                  50
             -5
                                                                  40
                                                                         The increase of seller1'
                                                                         profit*
            -10                                                   30
                                                                         The increase of seller2's
                                                                         profit*
                                                                  20
            -15
                                                                  10   *The compared basic data
                                                                       are of case 1
            -20                                                   0
                             systematic search cost
                                                                           33




When the Return Cost Is High
l   In case 3, the price and the profit of sellers change in the same
    pattern as the case 1.
l   In case 3, the profit of seller 2 is higher than that in case 1. But
                 s
    the seller1’ profit is lower. That is because when the
    systematic search cost is higher than 0.2, seller 2 will set the
    non-systematic search cost, which is higher than zero, to utilize
    the high return cost in order to lock the consumer. So the profit
    of seller 2 is boosted.
l   When systematic search cost is higher than 0.3, the profit of
    seller2 is close to saturation. So the increase amount of
            s
    seller2’ profit is becoming more and more smaller. So does the
    decreasing amount of seller1.
                                                                     34




When the Return Cost Is High

         Both sellers’
 Case 4 £º            systematic search costs are increased


     Compared with case 2 in which the return cost is
relatively lower, the profits in case 4 is a little higher than
case 2. And this increase is due to the non-systematic
search cost set by the seller 2, the market follower, because
in this way, seller 2 can offset a part of loss of profit by lock-
in the consumers.
                                 35




Contents

   l   Introduction
   l   Model Description
   l   Model Analysis
   l   Managerial Implications
   l   Conclusion
                                                                                               36




    Managerial Implications
    Low-return-cost Market                              High-return-cost Market


1 The higher systematic search cost is a       1
  disadvantage to the followers
                                               2
   It is recommended that the seller may               The same as the left
2
  invest in technologies, e.g. the Internet,   3
  to make search easier and lower the
  systematic search cost                       4

3    The follower can put the leader into      5    market followers might choose to
    a disadvantageous circumstance by              differentiate themselves to increase the
    realizing the information technology           non-systematic search cost. Even if the
    first.                                         leaders build the electronic transaction
     The leader should utilize the                 market firstly, the followers can also
4
     technology to consolidate their               differentiate themselves to set a defence
     power in the market.                          state against the competitors .
                                 37




Contents

   l   Introduction
   l   Model Description
   l   Model Analysis
   l   Managerial Implications
   l   Conclusion
                                                  38




Conclusion
l   It is shown that the technologies, e.g. the
    Internet, which makes search easier, can
    benefit the sellers both in low-return-cost
    market and in high-return cost-market.
l   This paper contributes to the marketing and
    economics literature by showing the ways in
    which firms can strategically use consumer
    search cost to enhance their performance on
    making profits
                                                      39




Conclusion
l   If the market condition is the same for the
    both sellers, seller 1 will gain more than
    seller 2. And the price of seller 1 will not be
    higher than seller 2, which is in accordance
    with the view put forward by Carlson and
    McAfee (1983).
l   Also, the systematic search cost will cast a
    negative influence on the social welfare. In
    this way, information technology will enhance
    the social performance.
                                                  40




Future Work
l   In this model, it is assumed that the
    utilities of the two products are
    independent of each other. However, in
    real life, this assumption is not always
    true, which should be considered in the
    further study.
l   The simulation result may not be very
    precise, so theoretical solution is needed.
          41




Thanks!

				
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