Virtual worlds are relatively nascent IT platforms with the potential to radically transform business processes and generate significant payoffs. However, in striving to achieve specific outcomes, firms may incur significant risks. Although many companies claim to have attained substantial benefits from their virtual world initiatives, many others have recently scaled down or even abandoned their experimental virtual world projects. This paper assesses the value proposition of virtual world initiatives from the real options perspective. Specifically, we argue that virtual worlds act as a firm's growth option, and we adopt the lens of real options to evaluate the value of this emerging and uncertain technological platform. We employ the event study method to assess the stock market's perception of the future revenue streams of 261 virtual world initiatives announced between 2006 and 2008. Our results indicate that, overall, the market reacts positively to virtual world initiatives. Our findings also show that investors' reactions to virtual world initiatives are contingent on four key characteristics of virtual world initiatives: interpretive flexibility (i.e., technologies that allow managers to experiment), divisibility (i.e., ability to incrementally implement the technology), strategic importance (i.e., an initiative that affects a process of strategic importance to the firm), and exploitable absorptive capacity (i.e., ability to exploit the knowledge acquired through the initiative). We discuss the key implications for real-world practitioners and suggest directions for future research.
Although efficiency-enhancing features of online markets have been well studied, much less is known about firms' differentiation strategies in these competitive markets or the outcomes of such differentiation. This study examines competition among firms in online sponsored search markets—one of the fastest growing and most competitive of online markets. We develop and test a model that predicts the clickthrough rate (CTR) of a seller's listing in a sponsored search setting. Drawing on consumer search theory and competitive positioning strategies, we theorize that CTR is jointly driven by a seller's positioning strategy as reflected by the unique selling proposition (USP) in its "ad creative," by its rank in a sponsored search listing, and by the nature of competition around the focal firm's listing. We use data from a field experiment conducted by a leading firm in the mortgage industry where the firm varied its rank and USP dynamically. Results suggest that sponsored search listings can act as effective customer segmentation mechanisms, consistent with a model of consumer search in directional markets. We further find that the effect on CTR of a firm's positioning strategy and its rank in a listing is strongly moderated by its ability to differentiate itself from adjacent rivals. We discuss the implications of our findings for sellers' strategies in sponsored search markets and for extending the understanding of consumer search behavior in directional markets.
Although research on three-dimensional virtual environments abounds, little is known about the social and business aspects of virtual worlds. Given the emergence of large-scale social virtual worlds, such as Second Life, and the dramatic growth in sales of virtual goods, it is important to understand the dynamics that govern the purchase of virtual goods in virtual worlds. Employing the stimulus-organism-response (S-O-R) framework, we investigate how technological (interactivity and sociability) and spatial (density and stability) environments in virtual worlds influence the participants' virtual experiences (telepresence, social presence, and flow), and how experiences subsequently affect their response (intention to purchase virtual goods). The results of our survey of 354 Second Life residents indicate that interactivity, which enhances the interaction with objects, has a significant positive impact on telepresence and flow. Also, sociability, which fosters interactions with participants, is significantly associated with social presence, although no such significant impact was observed on flow. Furthermore, both density and stability are found to significantly influence participants' virtual experiences; stability helps users to develop strong social bonds, thereby increasing both social presence and flow. However, contrary to our prediction of curvilinear patterns, density is linearly associated with flow and social presence. Interestingly, the results exhibit two opposing effects of density: while it reduces the extent of flow, density increases the amount of social presence. Since social presence is found to increase flow, the net impact of density on flow depends heavily on the relative strength of the associations involving these three constructs. Finally, we find that flow mediates the impacts of technological and spatial environments on intention to purchase virtual products. We conclude the paper with a discussion of the theoretical and practical contributions of our findings.
Online sponsored search advertising has emerged as the dominant online advertising format largely because of their pay-for-performance nature, wherein advertising expenditures are closely tied to outcomes. While the pay-for-performance format substantially reduces the wastage incurred by advertisers compared to traditional pay-per-exposure advertising formats, the reduction of such wastage also carries the risk of reducing the signaling properties of advertising. Lacking a separating equilibrium, low-quality firms in these markets may be able to mimic the advertising strategies of high-quality firms. This study examines this issue in the context of online sponsored search markets. Using data gathered from sponsored search auctions for keywords in a market without intervention by the intermediary, we find evidence of adverse selection for products/services characterized by high uncertainty. On the other hand, there is no evidence of adverse selection for similar products in a regulated sponsored search market, suggesting that intervention by the search intermediary can have a significant impact on market outcomes and consumer welfare.
Given the increasingly important role of the Internet in education, healthcare, and other essential services, it is important that we develop an understanding of the "digital divide." Despite the widespread diffusion of the Web and related technologies, pockets remain where the Internet is used sparingly, if at all. There are large geographic variations, as well as variations across ethnic and racial lines. Prior research suggests that individual, household, and regional differences are responsible for this disparity. We argue for an alternative explanation: Individual choice is subject to social influence ("peer effects") that emanates from geographic proximity; this influence is the cause of the excess variation. We test this assertion with empirical analysis of a data set compiled from a number of sources. We find, first, that widespread Internet use among people who live in proximity has a direct effect on an individual's propensity to go online. Using data on residential segregation, we test the proposition that the Internet usage patterns of people who live in more ethnically isolated regions will more closely resemble usage patterns of their ethnic group. Finally, we examine the moderating impact of housing density and directly measured social interactions on the relationship between Internet use and peer effects. Results are consistent across analyses and provide strong evidence of peer effects, suggesting that individual Internet use is influenced by local patterns of usage. Implications for public policy and the diffusion of the Internet are discussed.