1 42001: Competitive Strategy Neale Mahoney Lecture 9. Network Effects I: Creating & Capturing Value
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
3 Changing the Game
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
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?
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…
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...
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 …
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?
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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