E -markets and channel power: An economic analysis of electronic sales of substitute products

Michael C Row, University of Pennsylvania

Abstract

This dissertation employs simulation modeling to explore the relationships between e-markets, channel power, and channel bypass strategies by providers in the context of electronic sales of substitute products. We model two processes associated with e-markets: “promotional prisoners' dilemma bargaining” and differential pricing and services (or “cream skimming”). We find that these two processes affect providers' appropriate strategy regarding channel bypass, influencing both the attractiveness of bypass and the incumbent channel's ability to punish that move. “Promotional prisoners' dilemma bargaining” is created where an e-market can leverage information about individual preferences to shift demand toward whichever provider is paying the highest promotional fees at that point. Our analysis suggests that where there is a large pool of relatively indifferent customers, such a bargaining process can be a significant threat to providers, creating incentives for dis-intermediation. However, the same conditions that create the benefits of bypass also increase an existing channel's ability to punish such a move. E-markets can more efficiently and effectively support “cream skimming” strategies that use differential pricing and services to target high profitability customers. Our analysis suggests that in the presence of large differences in customer profitability, there can be a strong incentive for providers to utilize e-markets for cream skimming. Moreover, rapid adoption and large differences in customer profitability may also limit an existing channel's ability to punish the bypass. We also model and analyze factors that moderate the relationships describe above, including patterns of brand preference, rate of e-market adoption, customer profitability differences, and the fixed cost structure of providers.

Subject Area

Business costs|Management|Economic theory

Recommended Citation

Row, Michael C, "E -markets and channel power: An economic analysis of electronic sales of substitute products" (2001). Dissertations available from ProQuest. AAI3003688.
https://repository.upenn.edu/dissertations/AAI3003688

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