Success and failure are driven as much by consumer

dissipate when the market gets larger. Success
and failure are driven as much by consumer
expectations and luck as by the underlying value
of the product (Shapiro and Varian, 1999).
Therefore marketing strategy designed to
influence consumer expectations in order to
achieve ‘‘critical mass’’ is vital in
markets in which strong network effects exist.
In addition, strategies such as the timing of
strategic moves, assembling a powerful group
of strategic partners, aggressive in pricing and
in exploiting relationships with complementary
products, are crucial in building and sustaining
a critical mass of installed base of customers
(Shapiro and Varian, 1999).
Supply-side and demand-side economies of
scale strengthen each other in the network
economy. The growth on the demand side
reduces the unit cost (and price) on the supply
side and makes the product more appealing to
other users. The result is the acceleration of
growth in demand for the products even more.
Scope effect
Economies of scope are cost-saving externalities
between product lines. For example, the
production of good A reduces the production cost
of good B (Tirole, 1988). The traditional concept
of economies of scope (or supply-side
economies of scope) was the rationale for
corporate related diversification strategy in the
industrial economy. In the marketspace, Rayport
and Sviokla (1995) indicate that businesses can
redefine economies of scope by drawing on a
single set of ‘‘digital assets’’ (i.e. information
companies collected about their customers) to
provide value across many different and
disparate markets.
These demand-side economies of scope,
combined with the demand-side economies of
352

An analytical framework for evaluating e-commerce business models Internet Research: Electronic Networking Applications and Policy
Chung-Shing Lee
Volume 11
.
Number 4
.
2001
.
349±359
Table II E-commerce cost model
Demand Supply
Scale effect Demand-side economies of scale (network Supply-side economies of scale
effects or network externalities) Key question . How to lower the unit cost of
Metcalfe’s law: the usefulness or utility of a providing products and/or services?
network equals the square of the number of Physical product/economy: increase scale to
users minimize average cost (subject to natural
Key question . How to reach the critical mass? capacity limits ± law of diminishing
Superior technology, products, or services returns)
Customer expectations management (e.g. Digital (or knowledge-based network)
competitive pre-announcements) economy/ information products: volume-
Timing of strategic moves driven strategy to spread fixed (sunk) cost
Strategic partnerships
Scope effect New concept of economies of scope: Traditional concept of economies of scope
X ! f …¢† ! ‰y Š, where X = digital asset Economies of scope realized when costs are
(e.g. information about the installed base of reduced by producing two or more products
customers); f (¢) = transformation process; and jointly (rather than in specialized firms):
[ y ] = lines of businesses, y
1
, y
2
, . . . , y
n
C
1
…y
1
; 0 † ‡ C
2
…0 ; y
2
† > C …y
1
; y
2
† or
P P
†, where }
i
…¢† ˆ cost Key question . How to leverage on a single set