Alarge body of research in economics, information systems, and marketing has sought to understand sources of price dispersion. Previous empirical work has mainly offered consumer- and/or product-based explanations for this phenomenon. In contrast, our research explores the key role played by vendors' price-format adoption in explaining price dispersion. We empirically analyze over a half-million online and offline prices offered by major U.S. airlines in the top 500 domestic markets. Our study shows that a vendor's price format remains an important source of price dispersion in both channels even after accounting for other factors known to impact dispersion in airline ticket prices. Importantly, this finding is true for both transacted and posted tickets. We document several other interesting empirical findings. First, the lower variance in the prices of "everyday low price" (EDLP) firms serves to reduce the market-level dispersion in prices when such firms are present. Moreover, the price variance of non-EDLP firms in these markets is also lower than in those markets in which EDLP competitors are absent. Second, we also find that dispersion in offered prices increases closer to the departure date, which is consistent with theoretical assertion that price dispersion increases with reservation prices. Finally, we continue to observe dispersion of online prices even after accounting for vendor strategy and other known sources of dispersion, suggesting that the prices are unlikely to converge even in the presence of sophisticated online search mechanisms.
As more and more firms seek to digitize their business processes and develop new digital capabilities, the enterprise systems software (ESS) has emerged as a significant industry. ESS firms offer software components (e.g., ERP, CRM, Marketing analytics) to shape their clients' digitization strategies. With rapid rates of technological and market innovation, the ESS industry consists of several horizontal markets that form around these components. As numerous vendors compete with each other within and across these markets, many of these horizontal markets appear to be crowded with rivals. In fact, multimarket contact and presence in crowded markets appear to be the pathways through which a majority of the ESS firms compete. Though the strategy literature has demonstrated the virtues of multimarket contact, paradoxically, the same literature argues that operating in crowded markets is not wise. In particular, crowded markets increase a firm's exposure to the whirlwinds of intense competition and have deleterious consequences for financial performance. Thus, the behavior of ESS firms raises an interesting anomaly and research question: Why do ESS firms continue to compete in crowded markets if they are deemed to be bad for financial performance? We argue that the effects of rivalry in crowded markets are counteracted by a different force, in the form of the economics of demand externalities. Demand externalities occur because the customers of ESS firms expect that software components from one market will be easily integrated with those that they buy from other markets. However, with rapid rates of technological innovation and market formation and dissolution, customers experience significant ambiguity in deciding which markets and components suit their needs. Therefore, they look at crowded markets as an important signal about the legitimacy and viability of specific components for their needs. Through their presence in crowded markets, ESS firms can signal their commitment to many of the components that customers might need for their digital platforms. Customers might find that such firms are attractive because their commitments to crowded markets can mitigate concerns about compatibilities between the components purchased across several markets. This unique potential for demand externality across markets suggests that ESS vendors might, in fact, benefit from competing in many crowded markets. We test our explanations through data across three time periods from a set of ESS firms that account for more than 95% of the revenue in this market. We find that ESS firms do reap performance benefits by competing in crowded markets. More importantly, we find that they can enhance their benefits from crowded markets if they face the same competitors in multiple markets, thereby increasing their multimarket contact with rivals. These results have interesting implications not just for understanding competitive conduct in the ESS industry but also in many of the emerging digital goods industries where the markets have similar competitive characteristics to the ESS industry. Our ideas complement emerging ideas about platform models of competition in the digital goods industry and provide important directions for future research.
Enterprise systems software (ESS) is a multibillion dollar industry that produces systems components to support a variety of business functions for a widerange of vertical industry segments. Even if it forms the core of an organization's information systems (IS) infrastructure, there is little prior IS research on the competitive dynamics in this industry. Whereas economic modeling has generally provided the methodological framework for studying standards-driven industries, our research employs social network methods to empirically examine ESS firm competition. Although component compatibility is critical to organizational end users, there is an absence of industry-wide ESS standards and compatibility is ensured through interfirm alliances. First, our research observes that this alliance network does not conform to the equilibrium structures predicted by economics of network evolution supporting the view that it is difficult to identify dominant standards and leaders in this industry. This state of flux combined with the multifirm multicomponent nature of the industry limits the direct applicability of extant analytical models. Instead, we propose that the relative structural position acquired by a firm in its alliance network is a reasonable proxy for its standards dominance and is an indicator of its performance. In lieu of structural measures developed mainly for interpersonal networks, we develop a measure of relative firm prominence specifically for the business software network where benefits of alliances may accrue through indirect connections even if attenuated. Panel data analyses of ESS firms that account for over 95% of the industry revenues, show that our measure provides a superior model fit to extant social network measures. Two interesting counterintuitive findings emerge from our research. First, unlike other software industries compatibility considerations can trump rivalry concerns. We employ quadratic assignment procedure to show that firms freely form alliances even with their rivals. Second, we find that smaller firms enjoy a greater value from acquiring a higher structural position as compared to larger firms.
Advances in information-acquisition technologies and the increasing strategic importance of this information have created a market for consumers' personal and preference information. Behavioral research suggests that consumers engage in a privacy calculus where they trade off their privacy costs from sharing information against their value from personalization. Through a formal economic model of this personalization-for-privacy (p4p) trade-off, we examine welfare implications by characterizing consumption utilities as "no-free-disposal" functions. We investigate the optimality of four regulatory regimes (through allowance/disallowance of usage-enforcing technologies, and private contracts) by analyzing the strategic interaction between a monopolist who offers personalization services "free of charge" and two consumer types--privacy and convenience seekers. While many privacy watchdog groups have called for technology restrictions and more regulation, our research broadly suggests that society is better off with assignment of property rights over their information to consumers and full allowance of technological control and contractual abilities for the monopolist. However, when private contracts are proscribed, the regulator should also prevent the deployment of usage-enforcing technologies, particularly when the market is predominantly composed of privacy seekers. Interestingly, unlike traditional price-instrument markets for goods with free disposal, a regulator should not only encourage this market's knowledge of consumers' p4p preferences but also the various uses and benefits of preference information to the vendor.
Digital goods lend themselves to versioning but also suffer from piracy losses. This paper develops a pricing model for digital experience goods in a segmented market and explores the optimality of sampling as a piracy-mitigating strategy. Consumers are aware of the true fit of an experience good to their tastes only after consumption, and as piracy offers an additional (albeit illegal) consumption opportunity, traditional segmentation findings from economics and sampling recommendations from marketing, need to be revisited. We develop a two-stage model of piracy for a market where consumers are heterogeneous in their marginal valuation for quality and their moral costs. In our model, some consumers pirate the product in the first stage allowing them to update their fit-perception that may result in re-evaluation of their buying/pirating decision in the second stage. We recommend distinct pricing and sampling strategies for underestimated and overestimated products and suggest that any potential benefits of piracy can be internalized through product sampling. Two counterintuitive results stand out. First, piracy losses are more severe for products that do not live up to their hype rather than for those that have been undervalued in the market, thus requiring a greater deterrence investment for the former, and second, unlike physical goods where sampling is always beneficial for underestimated products, sampling for digital goods is optimal only under narrowly defined circumstances due to the price boundaries created by both piracy and segmentation.
As products on the Web are continually enhanced through "free" Web based services that add to the product purchase experience, it is important to understand how these free services may affect pricing and customer retention strategies of an online vendor. This paper argues that product competition on the Web is not for generic products but, rather, for expected and augmented product bundles. Our findings point out that even in the absence of price premiums, variance in the ability to after online services can affect pricing strategies and possibly contribute to online price dispersion. We then go on to suggest that online services affect a vendor's customer retention strategy as they influence the design of the augmented product. We characterize an online vendor's selection of augmenting services as a knapsack problem, and recommend that the online vendor should not only periodically reevaluate the set of services offered to satisfy the expected product requirements, but also assess the customer retention ability of his augmented product. A service does not contribute to customer retention when it has either lost its value to the customer or become required as a part of the expected product. Our solution recommends that a vendor should include new services based on the cost-to-value ratio of each service so as to remain above the loyalty threshold of a consumer. The results from our model partially explain the variety in product offerings of many online vendors, whose competency in providing Web-based services allows them to vary the generic product.
Even if bandwidth on the Internet is limited, compression technologies have made online music piracy a foremost problem in intellectual copyright protection. However, due to significantly larger sizes of video files, movies are still largely pirated by duplicating DVDs, VCDs, and other physical media. In the case of DVDs, movie studios have historically maintained different technology codes or formats across various regions of the world, primarily to control the timing of theatrical releases in these parts of the world. This paper formulates an analytical model to study the implications of maintaining different or incompatible technology standards in DVD and other optical disc players on global pricing and piracy of movie discs. Our formulation develops two distinct piracy types, namely, regional and global piracy, signifying if consumers will pirate movies released for their own region or those meant for other regions. Our results find that maintaining separate technology standards is very critical when there is piracy, as losses from global piracy can be higher than when only regional piracy exists. Further, we observe that piracy is not a victimless crime, in that not only do producers suffer losses but consumers in regions with high willingness to pay for quality also stand to lose. In addition, we find that increasing homogeneity in consumer preferences for quality across regions may not be beneficial to digital product vendors unless there is also uniformity in copyright protection laws. We conclude with recommendations for research and practice for movie studios as well as producers for other goods that are dependent on copyright protection such as books and pharmaceuticals.