• Selected
• Entire List

Abstract:
We present a framework and empirical estimates that quantify the economic impact of increased product variety made available through electronic markets. While efficiency gains from increased competition significantly enhance consumer surplus, for instance by leading to lower average selling prices, our present research shows that increased product variety made available through electronic markets can be a significantly larger source of consumer surplus gains.

One reason for increased product variety on the Internet is the ability of online retailers to catalog, recommend and provide a large number of products for sale. For example, the number of book titles available at Amazon.com is over 23 times larger than the number of books on the shelves of a typical Barnes & Noble superstore and 57 times greater than the number of books stocked in a typical large independent bookstore.

Our analysis indicates that the increased product variety of online bookstores enhanced consumer welfare by $731 million to $1.03 billion in the year 2000, which is between seven to ten times as large as the consumer welfare gain from increased competition and lower prices in this market. There may also be large welfare gains in other SKU-intensive consumer goods such as music, movies, consumer electronics, and computer software and hardware.

Consumer Surplus, Product Variety, Electronic Markets

Abstract:
Information systems and the Internet have facilitated the creation of used product markets that feature a dramatically wider selection, lower search costs, and lower prices than their brick-and-mortar counterparts do. The increased viability of these used product markets has caused concern among content creators and distributors, notably the Association of American Publishers and Author's Guild, who believe that used product markets will significantly cannibalize new product sales.

This proposition, while theoretically possible, is based on speculation as opposed to empirical evidence. In this paper, we empirically analyze the degree to which used products cannibalize new product sales for books - one of the most prominent used product categories sold online. To do this, we use a unique dataset collected from Amazon.com's new and used book market-places to measure the degree to which used products cannibalize new product sales. We then use these estimates to measure the resulting first-order changes in publisher welfare and consumer surplus.

Our analysis suggests that used books are poor substitutes for new books for most of Amazon's customers. The cross-price elasticity of new book demand with respect to used book prices is only 0.088. As a result only 16% of used book sales at Amazon cannibalize new book purchases. The remaining 84% of used book sales apparently would not have occurred at Amazon's new book prices. Further, our estimates suggest that this increase in book readership from Amazon's used book marketplace increases consumer surplus by approximately $67.21 million annually. This increase in consumer surplus, together with an estimated $45.05 million loss in publisher welfare and a $65.76 million increase in Amazon's profits, leads to an increase in total welfare to society of approximately $87.92 million annually from the introduction of used book markets at Amazon.com.

Publisher welfare, retailer welfare, consumer surplus, price competition, used books sales, electronic markets

Abstract:
Internet shopbots compare prices and service levels at competing retailers, creating a laboratory for analyzing consumer choice. We analyze 20,268 shopbot consumers who select various books from 33 retailers over 69 days for a total of 1,512,856 observed offers. Although each retailer offers a homogeneous product, we find that brand is an important determinant of consumer choice. Consumers use brand as a proxy for retailer credibility in non-contractible aspects of the product and service bundle, such as shipping reliability. Our results also suggest that consumers are sensitive to how total price is allocated between the item price, shipping price, and tax.

Abstract:
As the Internet develops into a robust channel for commerce, it will be important to understand the characteristics of electronic markets. Businesses, consumers, government regulators, and academic researchers face a variety of questions when analyzing these nascent markets. Will electronic markets have less friction than comparable conventional markets? What factors lead to dispersion in Internet prices? What are the major electronic commerce developments to watch in the coming years? This paper addresses these questions by reviewing current academic research, discussing the implications of this research, and proposing areas for future study. We review evidence that Internet markets are more efficient than conventional markets with respect to price levels, menu costs, and price elasticity. However, several studies find substantial and persistent dispersion in prices on the Internet. This price dispersion may be explained, in part, by heterogeneity in retailer-specific factors such as trust and awareness. In addition, we note that Internet markets are still in an early stage of development and may change dramatically in the coming years with the development of cross-channel sales strategies, infomediaries and shopbots, improved supply chain management, and new information markets.

Abstract:
We estimate the magnitude of consumer search benefits and costs using data obtained from a major Internet shopbot. For the median consumer, the benefits to searching lower screens are $6.55 while the cost of an exhaustive search of the offers is a maximum of $6.45. We are also able to estimate price elasticities and find that they are relatively high compared to offline markets (-7 to -10 in our base model). Our results suggest that consumers face fairly high costs to search for information online, even in the "nearly perfect" market of the shopbot.

Search costs, shopbot, product differentiation, random coefficients choice model

Abstract:
Peer-to-peer file sharing networks are becoming an important medium for the distribution of information goods. However, there is little academic research into the optimal design of these networks under real-world conditions. Our research represents an initial effort to analyze the impact of positive and negative network externalities on the optimal size of these P2P networks. Our analysis uses a unique dataset collected from the six most popular OpenNap peer-to-peer networks between December 19, 2000 and April 22, 2001.

We find that users contribute value to the network in terms of additional content and additional replicas of content at a diminishing rate, while they impose costs on the network in terms of congestion on shared resources at an increasing rate. Together these results suggest that the optimal size of peer-to-peer networks is bounded — at some point the costs a marginal user imposes on the network will exceed the value they provide.

peer-to-peer, file sharing, empirical, network externalities, network size

Abstract:
Peer-to-Peer (P2P) networks have emerged as a significant social phenomenon for the distribution of information goods and may become an important alternative to traditional client-server network architectures for knowledge sharing within enterprises. This paper reviews and synthesizes the relevant computer science and economics literatures as they relate to P2P networks, and raises important questions for researchers interested in studying the behavior of these networks from the perspective of the economics of information technology.

With regard to the economic characteristics of these networks, we show that while the characteristics of services provided over P2P networks are similar to public goods and club goods, they have many important differences and hence there is a need for new theoretical models as well as empirical and experimental analysis to understand P2P user behavior. We then identify several important areas for study with regard to the economics of P2P networks and review recent academic papers in each area.

Peer-to-peer, club goods, public goods, network externalities

Abstract:
Our research empirically analyzes consumer behavior at Internet shopbots- sites that allow consumers to make "one-click" price comparisons for product offerings from multiple retailers. By allowing researchers to observe exactly what information the consumer is shown and their search behavior in response to this information, shopbot data has unique strengths for analyzing consumer behavior.

Furthermore, the method in which the data is displayed to consumers lends itself to a utility-based evaluation process, consistent with econometric analysis techniques.
While price is an important determinant of customer choice, we find that, even among shopbot consumers, branded retailers and retailers a consumer visited previously hold significant price advantages in head-to-head price comparisons. Further, customers are very sensitive to how the total price is allocated among the item price, the shipping cost, and tax, and are also quite sensitive to the ordinal ranking of retailer offerings with respect to price. We also find that consumers use brand as a proxy for a retailer's credibility with regard to non-contractible aspects of the product bundle such as shipping time. In each case our models accurately predict consumer behavior out of sample, suggesting that our analyses effectively capture relevant aspects of consumer choice processes.

Internet, Choice Models, Brand, Service Quality, Partitioned Pricing, Intermediaries

Abstract:
The impact of low search costs in Internet markets has received a great deal of attention in the academic literature and in the press. While many have argued that the presence of low search costs will lead to strong price competition and vanishing margins, the empirical evidence is decidely mixed. Reflecting this uncertainty, firms have taken radically different strategies with regard to facilitating search across sites. Some firms have actively blocked or attempted to limit price search (e.g., by refusing to be listed at shopbots) while others have actively encouraged price search.

In this research, we use a unique dataset of detailed customer survey data to analyze the impact of consumer search behavior on the formation of consideration sets and the consumer's ultimate purchase decision. We find that while searching across market leaders is not detrimental for market followers, searching across market followers is somewhat detrimental for market leaders. These results suggest that today's market leaders may be at risk from increased consumer adoption of broad search technologies such as Internet shopbots.

Consumer search costs, competition, consideration set formation, empirical, survey

Abstract:
Peer-to-peer networks have emerged as a popular alternative to traditional client-server architectures for the distribution of information goods. Recent academic studies have observed high levels of free-riding in various peer-to-peer networks, leading some to suggest the imminent collapse of these communities as a viable information sharing mechanism.

Our research develops both static and dynamic analytic models to analyze the behavior of peer-to-peer networks in the presence of free-riding. In contrast to previous predictions we find that free-riding is sustainable in equilibrium and in some cases occurs as part of the socially optimal outcome. However, we also show that without external incentives, the level of freeriding in peer-to-peer networks will be higher than the socially optimal level. Finally, we show that quality of service tied to the contribution of content can be used as a lever to induce users to share and thereby achieve the socially optimal outcome for the network.

peer-to-peer, free-riding, public goods, club goods, incentives

Abstract:
Content Delivery Networks (CDNs) are a vital component of the Internet's content delivery value chain, servicing nearly a third of the Internet's most popular content sites. However, in spite of their strategic importance little is known about the optimal pricing policies or adoption drivers of CDNs. We address these questions using analytic models of CDN pricing and adoption under Markovian traffic and extend the results to bursty traffic using numerical simulations.

When traffic is Markovian, we find that CDNs should provide volume discounts to content providers. In addition, the optimal pricing policy entails lower emphasis on value-based pricing and greater emphasis on cost-based pricing as the relative density of content providers with high outsourcing costs increases. However, when traffic is bursty and content providers have varying levels of traffic burstiness, as ex-pected in reality, volume discounts may be suboptimal and may even be replaced by volume taxes. Fi-nally, a pricing policy that accounts for both the mean and variance in traffic such as percentile-based pricing is more profitable than pure volume-based pricing when there is heterogeneity in burstiness across content providers. This finding is in contrast to the current practices of many CDN firms that use pure volume-based pricing.

Content delivery networks, internet, pricing, bursty traffic, web hosting, media delivery

Abstract:
Improving the information retrieval (IR) performance of P2P networks is an important and challenging problem. Recently, the computer science literature has tried to address this problem by improving the efficiency of search algorithms. However, little attention has been paid to improving performance through the design of incentives for encouraging users to share content and, mechanisms for enabling peers to form communities based on shared interests.

Our work draws on the club goods economics literature and the computer science IR literature to propose a next generation file sharing architecture addressing these issues. Using the popular Gnutella 0.6 architecture as context, we conceptualize a Gnutella ultrapeer and its local network of leaf nodes as a club (in economic terms). We specify an IR-based utility model for a peer to determine which clubs to join, for a club to manage its membership, and for a club to determine to which other clubs they should connect.

We simulate the performance of our model using a unique real-world dataset collected from the Gnutella 0.6 network. These simulations show that our club model accomplishes both performance goals. First, peers are self-organized into communities of interest - in our club model peers are 85% more likely to be able to obtain content from their local club than they are in the current Gnutella 0.6 architecture. Second, peers have increased incentives to share content - our model shows that peers who share can increase their recall performance by nearly five times over the performance offered to free-riders. We also show that the benefits provided by our club model outweigh the added protocol overhead imposed on the network, that our results are stronger in larger simulated networks, and that our results are robust to dynamic networks with typical levels of user entry and exit.

Peer-to-peer, club economics, dynamic network, empirical

Abstract:
Improving the information retrieval (IR) performance of P2P networks is an important and challenging problem. Recently, the computer science literature has tried to address this problem by improving the efficiency of search algorithms. However, little attention has been paid to improving performance through the design of incentives for encouraging users to share content and, mechanisms for enabling peers to form communities based on shared interests.

Our work draws on the club goods economics literature and the computer science IR literature to propose a next generation file sharing architecture addressing these issues. Using the popular Gnutella 0.6 architecture as context, we conceptualize a Gnutella ultrapeer and its local network of leaf nodes as a club (in economic terms). We specify an IR-based utility model for a peer to determine which clubs to join, for a club to manage its membership, and for a club to determine to which other clubs they should connect.

We simulate the performance of our model using a unique real-world dataset collected from the Gnutella 0.6 network. These simulations show that our club model accomplishes both performance goals. First, peers are self-organized into communities of interest - in our club model peers are 85% more likely to be able to obtain content from their local club than they are in the current Gnutella 0.6 architecture. Second, peers have increased incentives to share content - our model shows that peers who share can increase their recall performance by nearly five times over the performance offered to free-riders. We also show that the benefits provided by our club model outweigh the added protocol overhead imposed on the network, that our results are stronger in larger simulated networks, and that our results are robust to dynamic networks with typical levels of user entry and exit.

Peer-to-peer, club economics, dynamic network, empirical

Abstract:
The movie industry represents one area where digital networks have had a particularly strong impact on economic activity. These digital networks provide copyright holders with new sales and promotional channels for their content, while also providing consumers with new opportunities to obtain high quality free copies of this content. Broadband access is a necessary condition for movie piracy and the movie industry has argued that the dominant impact of increased broadband Internet penetration will be increased piracy, and reduced media sales.

We analyze this hypothesis by applying fixed effects and first difference models to a new dataset quantifying changes in broadband Internet penetration and DVD sales at a local level from 2000 to 2003. Contrary to industry concerns, we find that increased broadband Internet penetration leads to a significant increase in DVD sales. Our results are robust across a variety of specifications. Using the most conservative results, we find that 9.3% of the $14.1 billion increase in DVD sales during our study period can be directly attributed to increased broadband Internet penetration. This corresponds to a $1.3 billion increase in DVD revenue and a $630 million increase in profits to movie studios.

Information goods, Internet penetration, movie promotion, DVD Sales

Abstract:
The creative industries have frequently expressed concern that they can't compete with freely available copies of their content. Competing with free is particularly concerning for movie stu-dios, whose content may be more prone to single-use consumption than other industries such as music. This issue has gained renewed importance recently with the advent of new digital video recording and distribution technologies, and the widespread availability of Internet piracy.

We examine competition between "free" and paid video content in two important contexts: the impact of legitimate free distribution in one channel on sales through paid channels, and the im-pact of illegitimate "free" distribution in pirated channels on sales through paid channels. We do this by studying the impact of movie broadcasts on DVD demand and the impact of piracy avail-ability at the time of broadcast on DVD demand for movies shown on over-the-air and cable television during an eight-month period in 2005-2006.

With respect to the impact of movie broadcasts on sales, we find that movie broadcasts on over-the-air networks result in an increase in DVD sales at Amazon.com by an average of 118% in the week after over-the-air broadcast. With respect to the impact of piracy on sales, we use the tele-vision broadcast as an exogenous demand shock and find that the availability of pirated content at the time of broadcast has no effect on post-broadcast DVD sales gains.

Together our results suggest that creative artists can use product differentiation and market seg-mentation strategies to compete with freely available copies of their content. Specifically, the post-broadcast increase in DVD sales suggests that giving away content in one channel can stimulate sales in a paid channel if the free content is sufficiently differentiated from its paid counterpart. Likewise, the example of post-broadcast piracy suggests that if free products appeal to a different customer segment than paid products do, the presence of free products need not harm paid sales.

Information goods, Movie broadcasts, movie promotion, DVD Sales, Broadcast flag, consumer surplus

Abstract:
Peer-to-peer (P2P) services allow users to share networked resources, notably bandwidth and content, from the edges of the network. These services have been popularized because of file sharing - particularly the sharing of unlicensed copyrighted files. Concerns about such P2P file sharing were highlighted by content owners' recent lawsuits against individual users and P2P network operators.

However, content owners are increasingly exploring the ability of peer-to-peer networks to accommodate legitimate content distribution and promotion. In this article we review the economic characteristics of P2P networks and outline the implications of these characteristics on efforts to counteract illegal piracy and on potential uses of P2P networks in a commercial media distribution strategy.

Peer-to-peer networks, digital business models, public goods, club goods, free riding

Abstract:
Online product review networks help to transmit information that customers can use to evaluate product quality. The prior literature has found that, in the aggregate, better product reviews lead to higher sales. However, product review networks increasingly include an explicit social component that allows consumers to evaluate individual reviews based on the status of the reviewer and on the "helpfulness" of the review to the community.

In this research, we extend this literature by analyzing the impact of reviews at a disaggregate level. We find that reviews that the community finds helpful have a stronger influence on consumers' purchase decisions than other reviews do. Moreover, these reviews have a stronger impact on less popular books than on more popular books, where consumers may be able to use other outside information sources to form an opinion of the product.

Overall, our results suggest that the micro-level dynamics of community interactions are valuable in signaling quality over-and-above aggregate-level scores. One implication of this result is that the micro-level dynamics of reputation communities make it harder for self-interested parties to manipulate reviews versus an environment where consumers only have aggregate quality measures.

electronic commerce, recommendation system, digital word-of-mouth, econometrics

Abstract:
Commentators have observed that the ease of monitoring competitors on the Internet may allow Internet retailers to engage in non-competitive pricing. Using data on the daily prices of 399 books at 26 online bookstores between August 1999 and January 2000, we investigate firm pricing behavior in the online book market. Although sales in the Internet channel were growing very rapidly at the time, we find that relative prices differed across the three categories of bookstores (big three, active fringe, and inactive fringe), and these differences were remarkably stable over time. We present a simple model in which cross-channel competition and differentially informed consumers lead to the observed (static) pricing patterns. Although relative prices were stable, prices did change and were on average increasing over time. We document the dynamic strategic interaction across firm categories and across individual firms. Ten pairs of firms involving seven individual firms changed prices in the same direction on the same book within three days in an (one standard deviation) above average number of cases and respond more than 25 percent of the time to competitors' price changes. Given the behavior of these firms and the large market shares held by the top three firms, we formally test a number of oligopoly and non-oligopoly explanations for the observed price changes. We find that the observed patterns were not consistent with the predictions of oligopoly pricing in the Haltiwanger and Harrington (1991) model or with other explanations such as customer loyalty, inventory considerations or changes in elasticity of demand associated with holidays. We conjecture that the observed cases of parallel pricing were largely attributable to experimentation on the part of the initiator and learning or competitive response on the part of the responder.

Internet, pricing, dynamic pricing, static pricing, books, oligopoly

Abstract:
Trust is particularly important in online markets to facilitate the transfer of sensitive consumer information to online retailers. In electronic markets, various proposals have been made to facilitate these information transfers. We develop analytic models of hidden information to analyze the effectiveness of these regimes to build trust and their efficiency in terms of social welfare.

We find that firms' ability to influence consumer beliefs about trust depends on whether firms can send unambiguous signals to consumers regarding their intention of protecting privacy. Ambiguous signals can lead to a breakdown of consumer trust, while the clarity and credibility of the signal under industry self-regulation can lead to enhanced trust and improved social welfare. Our results also indicate that although overarching government regulations can enhance consumer trust, regulation may not be socially optimal in all environments because of lower profit margins for firms and higher prices for consumers.

Privacy, asymmetric information, Internet, consumer surplus, producer surplus, social welfare

Abstract:
Sponsored search accounts for 40% of the total online advertising market. These ads appear as ordered lists along with the regular search results in search engine results pages. The conventional wisdom in the industry is that the top position is the most desirable position for advertisers. This has led to intense competition among advertisers to secure the top positions in the results pages.

We evaluate the impact of ad placement on revenues and profits generated from sponsored search using data from for several hundred keywords from the ad campaign of an online retailer. Using a hierarchical Bayesian model, we measure the impact of ad placement on both click-through rate and conversion rate for these keywords. We find that while click through rate decreases with position, conversion rate first increases and then decreases with position. The net effect is that, contrary to conventional wisdom, the topmost position in sponsored search advertisements is not necessarily the revenue- or profit-maximizing position. Using a theoretical model we show that one potential driver of these results is the heterogeneity in search costs across consumers and the additional browsing cost incurred in evaluating products across multiple websites.

Our results inform the advertising strategies of firms participating in sponsored search auctions and provide insight into consumer behavior in these environments. Specifically, they help correct a significant misunderstanding among advertisers regarding the value of the top position. Further, they reveal potential inefficiencies in present auction mechanisms used by the search engines.

Sponsored search, ad placement, hierarchical Bayesian estimation, online advertising, online auctions, search engine marketing

Abstract:
Personalization is a key component of an interactive marketing strategy. Its purpose is to adapt a standardized product or service to an individual customer's needs. The goal is to create profit for the producer and increased value for the consumer. This goal fits nicely into traditional notions of segmentation. Applications of personalization have advanced greatly in conjunction with the Internet, since it provides an environment that is information rich and well suited to interactivity. This article reviews past research on personalization and considers some examples of personalization in practice. We discuss what we believe are key problems and directions for personalization in the future.

Interactive marketing, personalization

Abstract:
The availability of digital distribution channels for media has raised several important questions for marketers. Notable among these are whether digital distribution channels will cannibalize physical sales and whether legitimate digital distribution will dissuade consumers from using digital piracy channels. We address these questions using the removal of NBC television content from Apple’s iTunes store in December 2007, and its restoration in September 2008, as natural shocks to the supply of legitimate digital content and analyzing its impact on DVD and piracy channels.

We find that NBC’s decision to remove its content from iTunes in December 2007 is causally associated with an 11.5% increase in the demand for pirated content. This is roughly equivalent to an increase of 53,000 downloads a day for NBC’s content which is approximately twice as large as NBC’s total legal purchases on iTunes for the same content prior to the removal. We also see no change in demand for NBC’s DVD content associated with the removal of the iTunes channel. Finally, we find evidence of a smaller, and statistically insignificant, decrease in piracy for the same content when it was restored to the iTunes store in September 2008.

digital distribution, channel conflict, cannibalization, iTunes, DVD

Abstract:
Contemporary users choosing a technology platform often run the risk of being stranded with a technology that becomes incompatible with a future dominant technology. The widely observed presence of network effects tends to exacerbate this consumer dilemma, as markets tend to "tip" towards a single, winner-take-all standard. This study seeks to show that such a dilemma can be solved in some circumstances for digital goods when conversion technologies are present.

The results from a duopoly model confirm that the existence of a converter can mediate the network effects of the pre-existing installed base. The conversion equilibrium is found to be more sustainable the higher the quality of conversion and the lower the conversion cost. Interestingly, both the entrant and the incumbent are shown to be better off by supplying a high quality converter. These findings have important implications for research and practice in adoption of new digital goods as the introduction of conversion technologies can reduce the social costs of standardization without compromising the benefits of network effects.

Network Effects, Conversion Technologies, Compatibility, Technology Standards, Digital Goods, Network Externalities

Abstract:
The growth of Internet price search tools, notably shopbots, has reduced consumers' search costs for price and some product characteristics. While a variety of analytic models predict that increased consumer search through shopbots will lower price levels among competing retailers, there is no consensus in the empirical literature as to whether price dispersion will increase or decrease in response to increased consumer search through shopbots. Moreover, there are no papers that have empirically tested these predictions using direct observation of variation in shopbot use over time.

This paper examines the impact of changes in shopbot use over time on pricing behavior in the Internet book market. Using price data obtained from a leading shopbot, combined with clickstream data on shopbot usage from August 1999 to July 2001, we show that an increase of 1% in shopbot use is correlated with a $0.41 decrease in price levels, after controlling for product and market characteristics. We also show that price dispersion decreases with shopbot use in a non-linear fashion. These findings are robust to controlling for potential simultaneity bias and the possible influence of prominent retailers, bestsellers, seasonality, and structural changes in the online book industry.

shopbot, price dispersion, internet clickstream, search cost

Abstract:
In spite of industry concerns, prior work has shown that Internet used book markets do not significantly cannibalize new book sales. In this research note we analyze similar data from markets for CDs and DVDs, goods that because of their digital characteristics may be more susceptible to cannibalization than books are.

We find that the cross price elasticity of new product demand with respect to used product prices is far higher for CDs (0.157) and DVDs (0.514) than it is for books (0.088). These higher cross price elasticities translate into higher levels of cannibalization: 24% of used CDs and 86% of used DVDs directly cannibalize new product sales. This compares to a 16% cannibalization rate for used book sales. Cannibalization is a concern to the music and movie industries because used sales generate no direct revenue to studios or royalties to artists.

From a managerial perspective, while the digital characteristics of these products may be driving increased levels of cannibalization in traditional channels, digital distribution may provide a solution to the cannibalization threat posed by secondary markets. While the first sale doctrine allows consumers to resell copyrighted physical media, the dominant legal view is that the first sale doctrine does not apply to products that are distributed digitally. Thus, one benefit of the transition from a physical to a digital distribution model is that it would also allow movie and music companies to transition away from secondary markets for used products, and the associated cannibalization effects.

Information Goods, Price elasticity, Digital distribution, First sale doctrine, Used Products, Electronic Markets

Abstract:
In markets that exhibit network effects, the presence of conversion technologies provides an alternative mechanism to achieve compatibility. This study examines the impact of conversion technologies on market equilibrium in the context of sequential duopoly competition and proprietary technology standards.

We analyze this question by departing from the extant literature to endogenize the decision to provide a converter and incorporate explicit negotiations between firms concerning the extent of conversion. We argue that these choices better reflect the environment facing firms in IT-industries and find that these decisions change some of the established results in the literature.

Specifically, we find that unless network effects are very large, the subgame perfect equilibrium involves firms' agreeing on providing converters at a sufficiently low price to all consumers. At this equilibrium, both the entrant and the incumbent are better off since the provision of converters alleviates price competition in the market and leads to both higher product revenues and higher proceeds from the sale of converters. Moreover, under some circumstances the provision of converters is welfare enhancing. These findings have important implications for research and practice in the adoption of new digital goods as the introduction of conversion technologies can reduce the social costs of standardization without compromising the benefits of network effects.

Network effects, standards competition, conversion technologies, flash memory, digital goods

Abstract:
In markets that exhibit network effects, the presence of conversion technologies provides an alternative mechanism to achieve compatibility. This study examines the impact of conversion technologies on market equilibrium in the context of sequential duopoly competition and proprietary technology standards.

We analyze this question by departing from the extant literature to endogenize the decision to provide a converter and incorporate explicit negotiations between firms concerning the extent of conversion. We argue that these choices better reflect the environment facing firms in IT-industries and find that these decisions change some of the established results in the literature.

Specifically, we find that unless network effects are very large, the subgame perfect equilibrium involves firms' agreeing on providing converters at a sufficiently low price to all consumers. At this equilibrium, both the entrant and the incumbent are better off since the provision of converters alleviates price competition in the market and leads to both higher product revenues and higher proceeds from the sale of converters. Moreover, under some circumstances the provision of converters is welfare enhancing.

These findings have important implications for research and practice in the adoption of new digital goods as the introduction of conversion technologies can reduce the social costs of standardization without compromising the benefits of network effects.

Network Effects, Network Externalities, Conversion Technologies, Compatibility, Technology Standards, Digital Goods

Abstract:
Dozens of markets of all types are in the early stages of a revolution as the Internet and related technologies vastly expand the variety of products that can be produced, promoted and purchased. Although this revolution is based on a simple set of economic and technological drivers, the authors argue that its implications are far-reaching for managers, consumers and the economy as a whole. This article looks at what has been dubbed the "Long Tail" phenomenon, examining how customers derive value from an important characteristic of Internet markets: the ability of online merchants to help consumers locate, evaluate and purchase a far wider range of products than they can typically buy via the traditional brick-and-mortar channels.

The article examines the Long Tail from both the supply side and the demand side and identifies several key drivers. On the supply side, the authors point out how e-tailers' expanded, centralized warehousing allows for more offerings, thus making it possible for them to cater to more varied tastes. On the demand side, tools such as search engines, recommender software and sampling tools are allowing customers to find products outside of their geographic area. The authors also look toward the future to discuss second order amplified effects of Long Tail, including the growth of markets serving smaller niches.

Product Variety, The Long Tail, Search Costs, Recommender Systems, Strategy