We study the impact of changes in the competitors' listings in organic search results on the performance of sponsored search advertisements. Using data from an online retailer's keyword advertising campaign, we measure the impact of organic competition on both click-through rate and conversion rate of sponsored search advertisements. We find that an increase in organic competition leads to a decrease in the click performance of sponsored advertisements. However, organic competition helps the conversion performance of sponsored ads and leads to higher revenue. We also find that organic competition has a higher negative effect on click performance than does sponsored competition. Our results inform advertisers on how the presence of organic results influences the performance of their sponsored advertisements. Specifically, we show that organic competition acts as a substitute for clicks, but has a complementary effect on the conversion performance.
Recent papers have shown that, in contrast to the long tail theory, movie sales remain concentrated in a small number of hits. These papers have argued that concentrated sales can be explained, in part, by heterogeneity in quality and increasing returns from social effects. Our research analyzes an additional explanation: how incomplete information may skew sales patterns. We use the movie broadcast on pay-cable channels as an exogenous shock to the availability of information, and analyze how this shock changes the resulting sales distribution.
Both theoretical and empirical evidence suggest that, in many markets with standards competition, network effects make the strong grow stronger and can "tip" the market toward a single, winner-take-all standard. We hypothesize, however, that low cost digital conversion technologies, which facilitate easy compatibility across competing standards, may reduce the strength of these network effects. We empirically test our hypotheses in the context of the digital flash memory card market. We first test for the presence of network effects in this market and find that network effects, as measured here, are associated with a significant positive price premium for leading flash memory card formats. We then find that the availability of digital converters reduces the price premium of the leading flash card formats and reduces the overall concentration in the flash memory market. Thus, our results suggest that, in the presence of low cost conversion technologies and digital content, the probability of market dominance can be lessened to the point where multiple, otherwise incompatible, standards are viable. Our conclusion that the presence of converters weakens network effects implies that producers of non-dominant digital goods standards benefit from the provision of conversion technology. Our analysis thus aids managers seeking to understand the impact of converters on market outcomes, and contributes to the existing literature on network effects by providing new insights into how conversion technologies can affect pricing strategies in these increasingly important digital settings.
In markets that exhibit network effects, the presence of digital 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 digital goods 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 (SPNE) involves firms' agreeing to provide digital converters at a sufficiently low price to all consumers. At this equilibrium, both the entrant and the incumbent are better off because 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.
Measuring peer influence in social networks is an important business and policy question that has become increasingly salient with the development of globally interconnected information and communication technology networks. However, in spite of the new data sources available today, researchers still face many of the same measurement challenges that have been present in the literature for over four decades: homophily, reflection and selection problems, identifying the source of influence, and determining preexisting knowledge. The goal of this paper is to develop an empirical approach for measuring information diffusion and discovery in online social networks that have these measurement challenges. We develop such an approach and apply it to data collected from 4,000 users of an online music community. We show that peers on such networks significantly increase music discovery. Moreover, we demonstrate how future research can use this method to measure information discovery and diffusion using data from other online social networks.
The Internet and related information technologies are transforming the distribution of product sales across products, and these effects are likely to grow in coming years. Both the Long Tail and the Superstar effect are manifestations of these changes, yet researchers lack consistent metrics or models for integrating and extending their insights and predictions. In this paper, we begin with a taxonomy of the technological and nontechnological drivers of both Long Tails and Superstars and then define and compare the key metrics for analyzing these phenomena. The core of the paper describes a large and promising set of questions forming a research agenda. Important opportunities exist for understanding future changes in sales concentration patterns; the impact on supply chains (including cross-channel competition, competition within the Internet channel, implications for the growth of firms, and the balance of power within the supply chain); implications for pricing, promotion, and product design; and, ultimately, the potential effects on society in general. Our approach provides an introduction to some of the relevant research findings and allows us to identify opportunities for cross-pollination of methods and insights from related research topics.
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 studios, 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 impact 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 availability at the time of broadcast on DVD demand. Our data include all 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 piracy and sales, we find that movie broadcasts on over-the-air networks result in a significant increase in both DVD sales at Amazon.com and illegal downloads for those movies that are available on BitTorrent at the time of broadcast. With respect to the impact of piracy on sales, we use the television 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 segmentation 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, our finding that the presence of pirated content does not cannibalize sales for the movies in our sample suggests that if free and paid products appeal to separate customer segments, the presence of free products need not harm paid sales.
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.
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 data set collected from Amazon.com's new and used book marketplaces 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, only16% 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.
Peer-to-peer (P2P) file sharing networks are an important medium for the distribution of information goods. However, there is little empirical research into the optimal design of these networks under real-world conditions. Early speculation about the behavior of P2P networks has focused on the role that positive network externalities play in improving performance as the network grows. However, negative network externalities also arise in P2P networks because of the consumption of scarce network resources or an increased propensity of users to free ride in larger networks, and the impact of these negative network externalities--while potentially important--has received far less attention. Our research addresses this gap in understanding by measuring the impact of both positive and negative network externalities on the optimal size of P2P networks. Our research uses a unique dataset collected from the six most popular OpenNap P2P networks between December 19, 2000, and April 22, 2001. W find that users contribute additional value to the network at a decreasing rate and impose costs on the network at an increasing rate, while the network increases in size. Our results also suggest that users are less likely to contribute resources to the network as the network size increases. Together, these results suggest that the optimal size of these centralized P2P networks is bounded--at some point the costs that a marginal user imposes on the network will exceed the value they provide to the network. This finding is in contrast to early predictions that larger P2P networks would always provide more value to users than smaller networks. Finally, these results also highlight the importance of considering user incentives--an important determinant of resource sharing in P2P networks--in network design.