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Economics of the Internet

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The Long Tail, Chris Anderson, (2006), "Ch. 1: The Long Tail," pp. 15-26. "Ch. 3: A Short History of the Long Tail," pp. 41-51, "Ch. 4: The Three Forces of the Long Tail," pp. 52-57.

You can go to www.wardhanson.com/econ153 and see all the notes and resource.

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a) Chris Anderson argues that products which are in low demand or have low sales volume can make up a market share that equals or exceeds the relatively few current bestsellers and blockbusters, if the distribution channel is large enough. Thus on a graph of product sales versus varieties a "long tail" is seen to the right. Online retailers can generate profit in the long tail of the graph, while traditional ones cannot due to the cost of stocking an inventory, etc. According to Anderson, the forces which have caused this effect are: 1) Democratizing the tools of production (e.g. the PC) 2) Lowering the transaction costs of consumption (e.g. the Internet) 3) Connecting consumers to drive demand to niches (e.g. Google). Three industries that have experienced growth due to this phenomenon are software design, online computer parts retailers, and online education.

Online software designers benefit from the third ...

Solution Summary

How the Internet can change markets and industries which have grown because of the long-tail effect.

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Economics of internet - Second Life

Below is the home page of Second Life, one of the leading examples of the immersive 3D environments emerging online. Attached are some readings about Second Life, as well as screen shots from several of the Second Life web site describing the online features. Please use this material to address the following questions

Part A:
Using the IPACE framework, compare and contrast the possibilities of online retailing using a site such as Second Life against the more established sites such as Amazon and eBay.

Part B:
Shown below are two screenshots by my newbie avatar looking at some "vacant land" that is currently being auctioned in Second Life. As seen in the first image, the current high bid for the entire island of Goondi is $2472 US (yes, that's really US dollars!) with a little more than a day left on the auction. This money is payable to the current owner of the land. There is also an ongoing monthly land use fee, payable to the operators of Second Life. For an entire island, the land use fee is a monthly charge of $195. The buyer of this land must assume the land use fee, which is independent of the sales price of the land. Assume the cost to Second Life of supporting an island is $65 per month, there is an annual interest rate of 12%, and no land is abandoned without auctioning it first.

How valuable is the creation of an Island to the SeconLife operators? Make your assumptions clear.

Part C:
How could Second Life utilize the lessons of Wikipedia to encourage open source contributions to its virtual world, while at the same time raise switching costs between Second Life and other competitive virtual worlds?
Part D:
Why might the Becker activity model be especially valuable in explaining the choices game users are making in using SecondLife? (Note: some of these statistics are shown below).

Part E:
How are the actions of brand marketers such as American Apparel in utilizing SecondLife an example of input substitution?

I - Information (Search versus experience)
P - Price (Can be cheaper online)
A - Assortment (Long Tail)
C - Convenience (sometimes not immediate delivery - like medicine,
sometimes can be immediate - like iTunes)
E - Entertainment (Considered weakest - people would rather go to the
shopping mall rather than shop online)

See attached file for full problem description.

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