Week Six Exercises

Digital Markets

Question 1
a) What experiences have you had with shopping online?

I have purchased many things online, from Ebay, a number of direct manufacturers, service providers, software subscriptions, and bookings of non-online services (tickets to sporting events). Most have been excellent, and (touch wood) I have not had any compromise of security, or lost money.


b) Describe a good experience.

I purchased basketball shoes from a manufacturer in China. It was an excellent experience due to a number of factors. I found the website by a Google search, of the product I was looking for. Once I had entered their website, I found a heap of other products that I was interested in. Their website allowed me to view the product I wanted, and had a number of pictures for each item, that you could open if desired. It had an easy payment process, using a shopping cart style of online purchasing. They were that good that I have since purchased products another three times from them, each time it is a hassle-free experience, and I buy with confidence.
If anyone is interested in this website........................
Too bad, they shut down!!! Makes me think either, I may have been one of the lucky ones, they sold their product too cheaply, another victim of the economic crisis, or the sweat-shop was shut down.


c) What did you like about the online store you used?

The purchasing process was easy to follow and well explained.
Their products were easy to scroll through, as their website was well laid out and easy to navigate.
The product was delivered quicker than they had estimated.
The price was reasonable, and there were no hidden costs.
I wasn’t ripped off!


d) Describe a bad experience.

Emirates flight bookings. They might be one of the best airlines to fly with, when they are not scraping the tail of the plane on the runway, but the Emirates website is appalling when trying to book a flight. I tried unsuccessfully for three days late last year to book a flight online, in the end I gave up and drove to the local Emirates office.


e) What problems did you have with the online store?

Apart from the website timing-out on a regular basis, during the booking process, the main problem was that once all of the details were entered, flight booked, seat picked out, meals specified, and extra requests made, when it came time to confirm the payment, the website would crash. I spoke to a number of other people who had tried to book flights with Emirates, and all of them said they had the same problem. This problem may have been rectified since, but it was a fine waste of my time, and as a result I will not use Emirates online booking facility again.
However, I must make a few things clear. Firstly, I (and the other people I spoke to) used the Middle-East website, and this may be the only one with this problem. Also, all other aspects of the website are great, it is easy to navigate, a lot of useful information available, and the online check-in feature is great. Finally, Emirates is an excellent airline, with unparalleled in-flight service.


f) What features make an online store more appealing?

Ease of use, timely processing of transactions, uncluttered pages, comprehensive and appropriate information about the product or service that is for sale, unambiguous instructions for purchasing process, and easy to find on a basic search.


g) What features make an online store less appealing?

The opposite of what I have mentioned above. There is also the loss of being able to touch, hear, smell and sometimes see the product you are buying. However, more importantly for me is the fear of the products or services I have paid for not being delivered, the product not being to the standard that I was lead to believe, and the possible loss of credit card security.


h) Should we expect to see the prices of goods and services rise or fall due to the migration of consumers online?

I cannot see any reason why it would drive prices up or down. However, that being said online consumers will have the ability in the future, to simply snub expensive or high mark-up retailers. As a result of this, I think you will find a far more even and narrow distribution of pricing on like items. The impact should then be squared entirely on the retailers to bring their pricing into line, or pay the price (lack of business). This can only be good for the consumer in regards to value for money, but on the flip-side larger companies with bigger buying power will ultimately eliminate smaller retailers that cannot compete in a price war. Then, down the track does that really help the consumer? I think not.


Question 2
a) The dispersion of prices (that is, the spread between the lowest and highest price for a particular product) will narrow.

As outlined in the MIT paper (Smith, 1999), “Price dispersion is typically seen as arising from high search costs or from consumers who are imperfectly informed of prices. Given these factors, it is natural to assume that if search costs are lower in Internet markets and if consumers are more readily informed of prices, price dispersion on the Internet should be lower than it is in comparable conventional markets. However, this hypothesis is not supported by existing evidence. Both Bailey (1998a, 1998b) and Brynjolfsson and Smith (1999) find that price dispersion is no lower in Internet markets as compared to conventional markets. Brynjolfsson and Smith find that prices for identical books and CDs at different retailers differ by as much as 50% and price differences average 33% for books and 25% for CDs. The authors attribute their findings to several factors, including market immaturity and heterogeneity in retailer attributes such as trust and awareness.”
In my opinion, I believe that the dispersion of price will narrow over time. However, this is driven by the customers desire to force this to happen. While there are people out there that do not take the time to shop around for the best price on given items, Web-traders will be able to maintain charging higher prices, on easy to find websites.


b) The importance of brand names will decrease.

I believe that this statement is false, and actually I think that the issue of brand names will become even more important. Personally, I feel safer buying a product from a trusted retailer online than I do when purchasing from another company for the first time. I feel that trust, in not only the product being purchased, but also in the ability of the company supplying the product, to deliver a pleasant purchasing experience, is paramount.
This is supported by the findings of (Smith, 1999), “Having a conventional world brand name may signal trust and soften price competition. Shankar, Rangaswamy, and Pustateri (1998) use survey data to show that prior positive experience with a brand in the physical world can decrease price sensitivity online. Brynjolfsson and Smith (1999) show that retailers with established conventional-world brand names are able to charge a price premium of 8-9% over prices at pure-play Internet retailers.”


c) Price competition will make all products cheaper.

According to (Smith, 1999), “The Bertrand model of price competition represents the extreme view of market efficiency. The Bertrand model assumes that products are perfectly homogeneous, consumers are informed of all prices, there is free market entry, a large number of buyers and sellers, and zero search costs. This setting yields pure price competition: the retailer with the lowest price receives all sales and as a result all prices are driven to marginal cost. Given the stark assumptions in the Bertrand model, it is not surprising that the existence of price dispersion — different prices charged for the same good at the same time — is one of the most replicated findings in economics (see Pratt, Wise, and Zeckhauser 1979; Dahlby and West 1986; Sorensen 1998 for example).”
There are a number of factors other than price competition to consider when assuming that this will decrease prices, such as product trust, consumer awareness, convenience, price discrimination and shopping experience. With these factors taken out of the equation, I guess you could say that price competition in a vacuum will make products cheaper. However, it is not so clear cut, and price competition has many other factors counter-acting it.


d) Digital markets will become dominated by a handful of mega-sites, like Amazon.com.

I believe that this is unlikely, due to the fact that there will be more than enough market share to be had by multiple companies. Also, if someone has a bad experience with one or more of these sites, they will need an alternative. Also, these mega-sites may eventually become cumbersome to navigate, due to a lack of specialisation, and in that scenario it may be more viable for customers to use specialist websites for their shopping, similar to boutique shops as opposed to large chain outlets.


e) How do you think the balance of power between buyers and sellers will change?

I believe that the power has and always will be with the buyer. After all is said and done, it is still the buyer who has the decision of ‘to buy’ or ‘not to buy’. For this reason, the buyers always have the power to keep a business running or send them out of the market. Even in digital markets this does not change, if goods are too expensive, or the service is not as good as it should be, the buyer has the choice and ability to buy the product elsewhere.
For the seller, it is the same as it always has been, it is all about providing quality goods or services, at a reasonable price, with good support, effective advertising, provide a pleasant shopping experience, and position yourself well in the market place (in digital markets, this means easy to find). After all this is done, sellers still have to hope that the buyers will respond, and sellers also need a little bit of luck.


f) Prices are clustered online.

As I explained in a), price dispersion still seems to be quite broad in online markets. Therefore, I would have to refute the statement that “Prices online are clustered”, it appears to be quite the opposite given the research collected in (Smith, 1999).
g) Online prices are elastic. (i.e. immune to change up and down with demand)
As outlined by (Smith, 1999), “Three studies analyze different aspects of price sensitivity in Internet markets. First, Goolsbee (1998) uses survey data to analyze how sensitive customers are to local sales tax rates. He finds that online consumers are highly sensitive to local tax policies: consumers who are subject to high local sales taxes are much more likely to purchase online (and presumably avoid paying the local sales tax). While this study does not specifically test price elasticity between Internet firms, it does point to a high degree of price sensitivity between the total cost of a good online and the total cost in a conventional outlet. For differentiated goods, measuring price elasticity to infer efficiency requires more interpretation. In differentiated goods markets, price sensitivity could be lower online than in conventional outlets for two reasons. First, lower online search costs may allow consumers to more readily locate products that better meet their needs (Alba et al 1997). Second, evaluating products online may lead to “missing information” regarding the characteristics of the product (Degeratu, Rangaswamy, and Wu 1998) and missing information may lead consumers to rely more heavily on other signals of quality, such as brand. Either of these factors could soften price competition — however, they have opposite outcomes with respect to efficiency. Two empirical studies analyze price sensitivity in electronic markets for differentiated goods. Degeratu, Rangaswamy, and Wu (1998) compare the price sensitivity of groceries sold through conventional and electronic outlets. They find that price sensitivity is lower among online grocery shoppers than it is for conventional-world shoppers. In a related study, Lynch and Ariely (1998) test customer price sensitivity by manipulating the shopping characteristics in a simulated electronic market for wine. The authors find that consumers will tend to focus on price when there is little other information available to differentiate products. However, providing better product information to customers softens price competition and increases product-customer fit.”
After analysing this text, it is somewhat indicated that online prices are a little more elastic than in conventional markets. This is mainly due to the ambiguity of the descriptions often given of products, which usually makes customers revert to price-based decisions. Also, the ease of finding goods on the internet quite often outweighs consumers desire to look any further for better pricing.


g) Online prices are generally transparent (the extent to which prices for a given product or service are known by buyers in the marketplace.).

This seems to ring true in my experience. However, there is nothing stopping an online store from opening up many ‘dummy’ competitor stores, and using them as a comparison, to make their original online stores price look extremely cheap. For this and many other reasons, it is still a case of ‘caveat emptor’ (let the buyer beware). Consumers still need to make themselves aware of the value of the products they are purchasing, before they start buying online.


Question 3
a) What types of m-commerce services does your cell phone provider offer?

I use Telstra pre-paid. I am only guessing at some of the services offered, but they include, Bpay, Mobile recharge, mobile internet access. There are possibly many more. However, I do not know of what they are.


b) Which of these services do you use?

I use the mobile recharge facility, and the Bpay services.


c) What types of transactions do you perform through your cell phone or other wireless device?

The one and only transaction I perform through my cell phone is, credit recharge for my pre-paid account. I used to perform banking transactions via phone banking. However, now I find it much easier to do online at home, only if it was urgent and I was not near a computer, would I conduct banking over the phone.


d) What types of transactions would you like to perform, but are currently unable to?

I have no great desire to be able to perform any transactions that are not already available to me. Therefore, I am more than happy with the services currently available. However, in the future I am sure that there will be many more services made available that I will take advantage of. This seems quite strange though, seeing as I do not even know that I need them yet, but undoubtedly will utilise them.


e) What is your opinion of wireless advertising/mobile marketing?

I despise it. I find it to be without doubt the most annoying marketing ploy that has ever been conceived thus far. The type I detest the most, is when the advertising is indiscriminent, and the services or products offered to me, have no appeal what so ever. If the advertising is structured, so as to analyse the searches made online and then market products akin to these keywords, then I find it is not so annoying, because the products and services are things I am actually interested in. The idea of mass-marketing without any consideration for the audience, to me means that the company is lazy, and has conducted no market research, therefore I will not purchase anything from them.


Further research
Chris Anderson, the editor of Wired Magazine, wrote a book called 'The Long Tail'. Anderson's theory of 'The Long Tail' has been widely acclaimed, but there has also been recent research which questions it's veracity. Conduct your own research about 'The Long Tail', and state your opinion in favour or against the theory. It is also worth reading about Pareto's Principle, the 80/20 Rule. How do the two relate to each other?

The phrase the Long Tail was first coined by Chris Anderson in an October 2004 Wired magazine article to describe the niche strategy of businesses, such as Amazon.com or Netflix, that sell a large number of unique items, each in relatively small quantities. Anderson elaborated the Long Tail concept in his book The Long Tail: Why the Future of Business Is Selling Less of More.
A frequency distribution with a long tail (the concept at the root of Anderson's coinage) has been studied by statisticians since at least 1946. The distribution and inventory costs of these businesses allow them to realize significant profit out of selling small volumes of hard-to-find items to many customers, instead of only selling large volumes of a reduced number of popular items. The group that purchases a large number of "non-hit" items is the demographic called the Long Tail.
Given a large enough availability of choice, a large population of customers, and negligible stocking and distribution costs, the selection and buying pattern of the population results in a power law distribution curve, or Pareto distribution. This suggests that a market with a high freedom of choice will create a certain degree of inequality by favouring the upper 20% of the items ("hits" or "head") against the other 80% ("non-hits" or "long tail"). This is known as the Pareto principle or 80–20 rule.
http://en.wikipedia.org/wiki/The_Long_Tail
The Pareto principle (also known as the 80-20 rule, the law of the vital few and the principle of factor sparsity) states that, for many events, roughly 80% of the effects come from 20% of the causes. Business management thinker Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo Pareto, who observed that 80% of the land in Italy was owned by 20% of the population. It is a common rule of thumb in business; e.g., "80% of your sales come from 20% of your clients." Mathematically, where something is shared among a sufficiently large set of participants, there will always be a number k between 50 and 100 such that k% is taken by (100 − k)% of the participants. However, k may vary from 50 in the case of equal distribution to nearly 100 when a tiny number of participants account for almost all of the resource. There is nothing particularly special about the number 80, but many systems will have k somewhere around this region of intermediate imbalance in distribution.
http://en.wikipedia.org/wiki/Pareto_principle
From the explanations of the two theories above, I have concluded that both have an essential element, whereby they hypothesise that a small percentage of your overall clients will produce the largest proportion of your sales. Also, that a smaller percentage of your products stocked, will produce the larger proportion of your overall sales.