1 1 On-line Marketing • The Impact of the Internet • The on-line marketing issues • Lal and Sarvary (1999) • Zettlemeyer (2000) 2 The Impact of the Internet • The reduction in search cost and transaction cost; • Disintermediation? • Intensify or soften price competition? 3 Issues on On-line Marketing • When and how does the introduction of the Internet decrease price competition (Lal and Sarvary, 1999; Bakos, 1997)? • How would the emergence of direct marketers change the competition between conventional retailers ( Balasubramanian, 1998)? 4 Issues on On-line Marketing • How would the presence of the Internet change firms’ optimal communication strategies on multiple channels? (Zettlemeyer, 2000) • Are the price on the Net lower than at conventional channels? • What kind of products are more suitable for the Internet channel?
Transcript
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1
On-line Marketing
• The Impact of the Internet
• The on-line marketing issues
• Lal and Sarvary (1999)
• Zettlemeyer (2000)
2
The Impact of the Internet
• The reduction in search cost and transaction cost;
• Disintermediation?
• Intensify or soften price competition?
3
Issues on On-line Marketing
• When and how does the introduction of the Internet decrease price competition (Lal and Sarvary, 1999; Bakos, 1997)?
• How would the emergence of direct marketers change the competition between conventional retailers ( Balasubramanian, 1998)?
4
Issues on On-line Marketing
• How would the presence of the Internet change firms’ optimal communication strategies on multiple channels? (Zettlemeyer, 2000)
• Are the price on the Net lower than at conventional channels?
• What kind of products are more suitable for the Internet channel?
2
5
Lal and Sarvary (1999)
• The Model
• Case 1- Distribution through stores only
• Case 2- Distribution through stores and the Net
• Implications
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The Model
• Two integrated firms producing a nondigitalgoods;
• Two segments of consumers with equal size
rq(r+f)+(1-q)(r-f)Product 2
q(r+f)+(1-q)(r-f)rProduct 1
Consumer 2Consumer 1
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• q: the probability that the unfamiliar brand has a better fit, q<1/2.
• k1 is the cost of making the shopping trip
k2 is the cost of visiting an additional store
• c1 : cost of selling good through stores
• c2 : cost of selling good through the Net
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Case 1: Stores only
The timing of the game
• Firms set prices;
• Consumers decide whether to buy or not and whether to search or not if buying;
• If a consumer decides to search and encounters bad fit, he decides to
buy the familiar brand, the bad-fit unfamiliar brand or nothing.
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Distribution through Stores: No Search Equilibrium
• What would be the reaction function of the two firms?
• In a no-search equilibrium, will a consumer encountering a bad fit buy his familiar brand?
• Under what conditions will (r-k1, r-k1) be a no-search Nash equilibrium?
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Conditions for the No-search Equilibrium (p1, p2)=(r- k1,r-k1 )
• Consumer’s IC for no search (assume that f>k2)
• Two possible deviations for firm i
1. Decreasing price to induce search by firm j’s customer.
What would be the deviation price?
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2. Decreasing price even further to retain firm j’s customer even on bad search.
What would be the deviation price?
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No-Search Equilibrium (Before)
)2(,]1
)[1( 11121 ckrckq
qkfrq −−<−−−−++
What are the Intuitions behind the conditions?
)1(1 2 fkf
q
q <<−
)3(.](2 11121 ckrckkfr −−<−+−−
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Explanations
• f has to be small enough compared with k2; (why?)
• f has to be large enough compared with c1; (why?)
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Distribution through Dual Channels
Two major differences:
• Consumers can order products directly from the Net without incurring a cost k1;
• A consumer can still order his familiar brand on the Net (without incurring k2 ) when encountering a bad search outcome.
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No-Search Equilibrium (After): Proposition 3
• Prices are assumed to be the same across two distribution channels;
• If consumers search, will they visit a second store?
• Under what conditions will (r,r) be a no-search Nash equilibrium?
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Consumer i’s Alternatives
• Search or no search;
• If no search, then buy either brand on the Net;
• If search with good fit, then buy brand j;
• If search with bad fit, then buy brand j from the store or buy brand i on the Net.
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No-search Equilibrium for Case 2
(p1, p2)=(r, r) is a Nash equilibrium if
• Consumers prefer no-search to search;
• Firm i will not deviate to induce search of firm j’s customers;
• Firm i will not decrease price to induce firm j’s customers to order brand i on the Net.
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)8()1(21 fqq
kf −<≤
)9(,])[1( 2211 crcqc
q
kfrq −<−−−++
Orcrcq
kfr )10(.]
1(2 22
1 −<−−
+−
)11()1(2 1
q
kfqf ≤−<
)12(.])21([2 22 crcfqr −<−−−20
Explanations
• f is small enough compared with k1 for consumers’ IC constraint.
• f is small compared with c1 (Why?)
• f is large enough. (Why?)
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Results
• The introduction of the Internet leads to higher prices and profits.
• If consumers do not search in the absence of the Internet, searching is even less attractive after the introduction of the Internet.
• If consumers did not engage in search before, they may do so after the introduction of the Internet.
• The introduction of the Net may decrease consumer search.
