Slides2_Industry

Slides2_Industry - The Economics of E-commerce and...

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The Economics of E-commerce and Technology Industry Analysis 1
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Industry Profits 2 In Econ 11, Economic Profits = 0 In reality, many industries have much higher profits:
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Industry Analysis Identify factors determining industry profitability. Provides context for strategic analysis. Analysis depends on market definition. Porter’s “five” forces Substitutes Competitor Rivalry New entrants Buyer bargaining power Supplier bargaining power Compliments 3
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Force 1: Substitutes A firm’s markup is determined by it’s demand elasticity Elasticity is determined opportunity cost of money WTP for book at Barnes & Noble depends on price of magazines, DVDs, food Substitutes outside the market being considered Strategic interactions not directly considered. What matters is perspective of individual firm is Demand for bread as category is highly inelastic Demand for one type of break highly elastic 4 dp dq q p e e p c p where 1
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Force 1: Substitutes What is a substitute? 1. Price of x goes up, then demand for y goes up. 2. If x and y indivisible goods, V xy <V x +V y Substitutes inside the market Example: Barnes & Noble and Amazon. Affects how our firm interacts with competitors. Depends on type of product differentiation. 5
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6 Bertrand benchmark Assumptions Two firms simultaneously set prices Constant marginal cost, c Firm with lowest price serves whole market
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Slides2_Industry - The Economics of E-commerce and...

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