Winner Take All: Competition, Strategy, and the Structure of Returns in the Internet Economy

Journal of Economics & Management Strategy, Vol. 14, No. 1, p. 141, Spring 2005

24 Pages Posted: 6 Dec 2000 Last revised: 18 Dec 2013

See all articles by Thomas H. Noe

Thomas H. Noe

University of Oxford - Said Business School; University of Oxford - Balliol College; Bank of Finland; European Corporate Governance Institute

Geoffrey Parker

Dartmouth College

Date Written: June 1, 2005

Abstract

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.

JEL Classification: D43, D46, G31

Suggested Citation

Noe, Thomas H. and Parker, Geoffrey, Winner Take All: Competition, Strategy, and the Structure of Returns in the Internet Economy (June 1, 2005). Journal of Economics & Management Strategy, Vol. 14, No. 1, p. 141, Spring 2005. Available at SSRN: https://ssrn.com/abstract=250371 or http://dx.doi.org/10.2139/ssrn.250371

Thomas H. Noe (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 3BJ
United Kingdom

University of Oxford - Balliol College ( email )

Broad St
Oxford, OX1 3BJ
United Kingdom

Bank of Finland ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

European Corporate Governance Institute ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Geoffrey Parker

Dartmouth College ( email )

Department of Sociology
Hanover, NH 03755
United States
603-646-9075 (Phone)

HOME PAGE: http://engineering.dartmouth.edu/people/faculty/geoffrey-parker

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