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Cost Structure, Transaction, and Networks

Can you respond to these four questions with 2-3 paragraphs each citing some decent references?

1. Explain why the cost structure associated with many kinds of information goods and services might imply a market supplied by a small number of large firms.

2. At the same time some internet businesses such as grocery home deliveries have continually suffered steep losses regardless of scale. Explain why.

3. Could lower transaction costs in e-commerce ever make it easier for small suppliers to compete?

4. Network externalities are often an important aspect of demand for information goods and services. (The benefits to customers of using software, participating in electronic markets, or using instant messaging increase with the number of other users.) How might network externalities affect firm operating strategies (pricing, output, and advertising) and firm size?

Solution Preview

I need to be careful not to give you straight answers. I'm giving you some rough ideas from which you can easily put together a rational answer.

1. Explain why the cost structure associated with many kinds of information goods and services might imply a market supplied by a small number of large firms.

Primarily because the start up costs of these kinds of industries are very high. Equipment, plant, and skilled labor are expensive.

Constant expansion of product lines. This field moves rapidly. Resources must always be present to skilfully adapt to rapid market changes.

Massive competition, including powerful competition abroad. This is an easy one - the big firms can go head to head with the major Japanese giants.

Constant research and development. This is expensive, especially in the experts you must hire to make the investments here worthwhile.

"Bundling of information goods": This means that while it is expensive to start up, once you're there, it costs almost nothing to make one more piece of information. Hence, large scale works. Revenue is increased here through bundling through volume. The more that can be bundled, the higher the profits. Clearly, such large scale data creation is done best by large, centralized firms.

All of these cost a fortune, making it easier for an oligopoly to dominate this field.

http://oz.stern.nyu.edu/io/pricing.html

2. At the same time some internet businesses such as grocery home deliveries have continually suffered steep losses regardless of scale. Explain why.

A great example of this is the grocery delivery business WebVan. The real issue here was that they needed scale (as all groceries do), and spend a fortune on this before they knew their market or their chances of success. The fact is that the revenue that was coming in ...

Solution Summary

The cost structures, transactions and networks are examined.

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