Paper Info
Title
Competing Across Technology-Differentiated Channels: The Impact of Network Externalities and Switching Costs
Abstract
Technology-driven commerce channels, such as the Web, possess several unique features that differentiate them from traditional channels. The interaction between firms operating across these differentiated channels involves interesting competitive dynamics that cannot be captured by isolated models of electronic markets. This paper develops a stylized spatial differentiation model to examine the impact of differences in channel flexibility, network externalities, and switching costs on competition between online, traditional, and hybrid firms. A basic model highlighting the moderating influence of the hybrid firm on both channels is extended to account for differential network externalities and switching costs across the two channels. Our analysis indicates that while network effects as well as switching costs lead to the tipping of markets, such tipping occurs primarily due to the moderating effects of the competing channel. More importantly, with network effects an increased market share does not translate into higher profits. Contradictory to conventional wisdom, our results indicate that in a static market, consumers rather than firms, benefit from increasing network externalities, with competitive effects outweighing the surplus-extraction abilities of firms. Our results also highlight the importance of alternative revenue streams and provide insights for firms grappling with issues of channel choice as well as integration and divestiture.
Year
DOI
Venue
2005
10.1287/mnsc.1040.0338
Management Science
Keywords
Field
DocType
differentiated channel,network effect,channel choice,network externalities,channel flexibility,differential network externality,network externality,traditional channel,competing channel,technology-driven commerce channel,hybrid firm,technology-differentiated channels,switching costs,e commerce,market share,profitability
Revenue,Divestment,Economics,Stylized fact,Microeconomics,Network effect,Conventional wisdom,Industrial organization,Market share,E-commerce,Profit (economics)
Journal
Volume
Issue
ISSN
51
3
0025-1909
Citations 
PageRank 
References 
28
2.48
3
Authors
1
Name
Order
Citations
PageRank
Siva Viswanathan132729.10