Success and failure are driven as much by consumer expectations and luck as by

Success and failure are driven as much by consumer

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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
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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
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