Lecture 9 - Creating & capturing value in the vertical chain - to post.pdf - 42001 Competitive Strategy Neale Mahoney Lecture 9 Network Effects I

Lecture 9 - Creating & capturing value in the vertical chain - to post.pdf

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1 42001: Competitive Strategy Neale Mahoney Lecture 9. Network Effects I: Creating & Capturing Value
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Plan for today Moves that “change the game” “Coopetition” Network effects: overview Network effects: expectations & takeoff Mini case studies: Opentable, Dropbox Break Real case study: Nintendo Mini case study: App Stores (to be continued in more detail next week …) 2
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3 Changing the Game
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4 Changing the game Important to know what game you’re playing Successful firms change the game to achieve the outcome they want: Change the players Change the information Change the moves Change the payoffs Brandenburger and Nalebuff discuss a number of eye- opening examples
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5 Change the players (1) Monsanto has a monopoly (70% margins) on NutraSweet / aspartame the artificial sweetener used in Coke & Pepsi, but its patent was due to expire in 1992 Coke & Pepsi don’t want to pay high prices but also concerned about consumer reaction to giving up the NutraSweet logo Coke encourages a new company HSC to build a plant and prepare an aggressive marketing campaign in anticipation of the US patent expiration What do you think happened?
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6 Change the players (2) CSX railroad was monopoly supplier of Gainesville, FL Charges $20.13/ton to deliver coal Gainesville negotiates with Norfolk Southern to deliver for $13.68/ton—problem is railroad stops 21 miles short Gainesville offers to pay the cost of building a spur from NS railroad to connect Seems like a great deal for NS, right? CSX’s response First, offers Gainesville a lower price, ~$18, if it agrees not to build the extension. Rejected. Second, threatens to leave the market entirely…
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7 Change the players (3) June 1989: Craig McCaw bidding for Lin Broadcasting Corp in order to acquire its cellular licenses McCaw sees these licenses as complementary to those he already owns and is willing to pay to build a national network Initial bid is $120/share vs. current price of $103.50 Lin seeks other potential buyers...
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8 Change the players: takeaways A new supplier can be very valuable to current buyers Buyers should be aggressive in drawing new competition into the market New competitors should recognize their value and get paid to play But be careful of changing the players in a way that creates an arms race A and B have a legal dispute. A hires a really expensive lawyer …
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9 Change the information In 1994, the Daily News raised its cover price from 40 cents to 50 cents This seemed surprising because its main rival, the Post , was test marketing a price cut to 25 cents at the same time What was going on?
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10 Change the moves That is, change the game tree Schelling example 1: an army that burns its bridges Game tree used to have two choices: fight or retreat Now the game tree only has one choice … fight!
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