Effects of E-Commerce on Markets (Equilibrium & Existence) Kaipichit Ruengsrichaiya (ไกรพิชิต เรืองศรีไชยะ)

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1858843

Main Questions •  What  are  the  effects  of  e-­‐commerce  in   economic  ac1vi1es,  par1cularly  transac1on?   •  Supposed,  e-­‐commerce  enhances  the   technological  efficiency,  does  it  improve   economic  efficiency  in  markets?    How?   •  If  it  does  improve,  how?  and  what  are  the   necessary  condi1ons?   Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Outline •  First  Part  :  Review  &  Discussion   –  Summary  of  the  technological  effects  of  the                   e-­‐commerce    and  internet  from  economic   perspec1ve   –  Review    on  early  models  of  e-­‐commerce  &   Discussion  on  the  effects  of  e-­‐commerce  on  the   markets   Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Outline •  Second  Part  :  Analysis  &  Models

   

–  Linear  Loca1on  Model   –  Circular  Loca1on  Model   –  Applica1on  to  E-­‐Commerce  Modelling  &  Analysis

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First Part : e Effects •  Technological  Effects    (Upside)   –  b/c    lower  cost  of  semi-­‐conductors   –  b/c    expansion  of  personal  computers   –  b/c    expansion  of    interconnec1on  infrastructure   (internet,  func1onal  soSware,  entertaining  apps)   Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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First Part : e Effects •  Technological  Effects    (Upside)    (con1nued)   –  THEN      lower  cost  and  price  of  ‘digitalized   lifestyle’,  especially  on  informa1on  processing   (communica1on,    replica1on,    gathering  ,  etc.) –  THEN    :    Lower  (get  rid  of?)  the  physical  limits   (1me  &  space)  in  people’s  interac1on    

 

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First Part : e Effects •  Economic  Effects     –  Organiza1on    (non-­‐market)  :  enhance  efficiencies   within  a  firm  (facilita1ons  on  communica1ons,   opera1onal  -­‐  admin  –  managerial  tasks  etc.)  :   PRODUCTION   –  Market    :  enhance  market  efficiency  for   communica1on  and  decision  making  of  market   par1cipants    =>  Lower  Transac1on  Cost  :   EXCHANGE Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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First Part : e Effects •  Discussion  :  Any  downsides?    Bad  Experiences?   –  Technological  Effects  ?   –  Economic  Effects    ?   How  do  they  harm  our  society  and  economic  benefit   in  both  direct  and  indirect  ways?    Any  CauBons?   Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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First Part : Some Questions •  Incen1ve  :  Economic  Agents  (consumers,   producers,  firms,  investors,  government)  try  to   make  use  of  informa1on  technology  and  e-­‐ commerce  for  their  own  benefits   –  In  e-­‐commerce,  can  digitalized  ac1vi1es  replace  the   tradi1onal  –  physical  ones?       –  As  a  society,  do  we  gain  from  e-­‐commerce   collec1vely?  



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First Part : Scope •  We  consider         ‘effects  of  e-­‐commerce  on  markets’      

Ø We  then  need  to  understand  the  basic  funcBons   of  a  market  and  its  parBcipaBons  of  economic   agents.     Ø Then  we  consider  how  e-­‐commerce  can  improve   its  efficiency. Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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First Part : Market Functions •  BASIC  FLOW  of  the  linkage  from  produc1on  to   consump1on  :  Each  step  adds  cost    “TransacBon   Cost”

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First Part : Market Functions •  Wholesaler  and  Retailer  serve  as  INTERMEDIARY     between  Producer  and  Consumer     •  They  incur  transac1on  cost  which  is  paid  by   consumer   •  What  if  e-­‐commerce  can  short-­‐cut  the   intermediary  and/or  lower  the  transac1on  cost  ? Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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First Part : Market Functions •  When  transac1on  cost  reduces  .  .  .     •  For  each  unit  of  a  product   –  Producer  receive  higher  (bid)  price  (produce  more)   –  Consumer  pay  lower  (ask)  price  (consume  more)  

Ø   Basically,  economic  welfare  improves Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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First Part : Market Functions

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First Part : Market Functions •  CLOSER  LOOK  on  market  transac1ons     Summary  of  Market  Func1ons  (3  steps  to  complete   an  economic  transac1on)     1.  Matching  Buyers  and  Sellers   2.  Facilita1on  of  Transac1ons   3.  Ins1tu1onal  Infrastructure   Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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First Part : Market Functions Step  1  :  Iden1fica1on

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First Part : Market Functions Step  2  :  Facilita1on

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First Part : Market Functions Step  3  :  Verifica1on

Ques1on  :  Where  and  How  does  e-­‐commerce  can   enhance  the  market  func1ons  ?    Any  limita1ons  and   possible  difficul1es  ?   Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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First Part : Roles of E-Commerce •  E-­‐Commerce  could  help  on   –  Informa1on  gathering  on     •  product    qualifica1on  and  its  offering     •  iden1fying  where  sellers  &  buyers  are  (loca1on  &   logis1cs)   •  price  comparisons

–  Providing  choices  of  logis1cs  and  seelement  

•  It  lowers  search  cost  &  transacBon  cost   Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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First Part : Roles of E-Commerce •  E-­‐Commerce  can  also  create  problems   –  Trust  the  informa1on  of  the  product  –  price  ?   –  What  if  something  wrong  ?         •  Sending  wrong  or  damage  products   •  Charging  higher  price  than  shown   •  Product  does  not  arrive  as  agreed  (product   qualifica1on,  1ming  etc.)  

•  E-­‐Commerce  has  Trust  &  Legal  Infrastructure   issues  .  .  .  However  .  .  .  Problems  vary  among   people  &  socie1es.   Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Second Part : Analysis & Models o  Linear City Model o  Circular City Model o  Application for Analysis of E-Commerce Market

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Second Part : Linear City Model •  Linear  City  Model  captures  the  essence  of   “Product  Differen1a1on”     –  Loca1on  Difference   –  Taste  difference    :  No  product  has  beeer  quality.   Consumers  just  have  different  taste  /  preferences  

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Second Part : Linear City Model Model  :  Horizontal  Differen1a1on   Consider  “Linear  City”  of  length  1  unit  (normalized)   –  Two  shops  located  at  two  ends  (at  “x”  =  0  and  “x”  =  1)   –  Consumers  are  equally  distributed  along  the  city   –  Consumer  has  to  ‘travel’  to  one  of  two  shops  to  buy  a   product.  The  transporta1on  cost  is  “t”   –  Each  consumer  wants  only  1  unit  of  product   –  Let      p  1    ,  p    2      denote  price  charged  by  shop  1  and  2   respec1vely   Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Second Part : Linear City Model

No,ce  :  a  consumer  located  at  “x”  has  a  travel  cost  to  each  shop   as  shown  in  figure  above     –  Let      s      denote  the  surplus  enjoyed  by  each  consumer  when   he  consumes  a  product   –  The  price  of  going  to  shop  1  (and  respec1vely  shop  2)  for  a   consumer  located  at  “x”  is      p    1    +      tx        (and      p    2    +    t    (1      −    x    )      at  shop   2  respec1vely)   Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Second Part : Linear City Model –  U1lity  from  consuming  at  shop  1  :     s − p1 − tx –  U1lity  from  consuming  at  shop  2  :     s − p2 − t (1 − x) –  Total  number  of  consumer  on  this  city  is  “N”  

We  then  consider  the  situa1on  where  the  prices   are  not  too  high  and  all  consumers  will  buy   from  either  shop  1  or  shop  2   Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Second Part : Linear City Model

–  There  exist  a  consumer  with  loca1on      x%        who  is  indifferent   between  buying  from  shop  1  and  shop  2 Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Second Part : Linear City Model So  the  demand  of  shop  1  depends  on  price  set  by  shop  2  and   vice  versa.     We  can  know  the  demand  from  each  shop  by  studying    the   consumer  who  is  indifferent  between  two  shops     ( p2 − p1 − t ) p1 + tx%= p2 + t (1 − x% ) ⇔ x% ( p1 , p2 ) =   2t   D1 ( p1 , p2 ) = Nx% ( p1 , p2 )    

 

D2 ( p1 , p2 ) = N [1 − x% ( p1 , p2 )]

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Second Part : Linear City Model To  consider  the  equilibrium  pricing  of  two  shops,  we   ASSUME       –  QuadraBc  TransportaBon  Cost   –  Normalize  Total  Demand  (N)  to  be  1   Demand  of  each  shop  is  following  



p1 + tx 2 = p2 + t (1 − x) 2 ⇔ x( p1 , p2 ) =

( p2 − p1 + t ) 2t

( p2 − p1 + t ) D1 ( p1 , p2 ) = x( p1 , p2 ) = 2t ( p − p2 + t ) D2 ( p1 , p2 ) = 1 − x( p1 , p2 ) = 1 2t Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Second Part : Linear City Model –  Profit    func1on  of  Firm  ‘i’  is  

Πi ( pi , p j ) = ( pi − c)( p j − pi + t ) / 2t –  Firm  ‘i’  chooses  its  own  price  to  maximize  profit    given  its   compe1tor’s  price.  Its  FOC    is  following,  for  both  firms  ‘i  =   1,  2’  :  

 

p j + c + t − 2 pi = 0

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Second Part : Linear City Model –  Using  symmetry  of  the  problem,  Nash  Equilibrium  prices   and  profits  are  following     p1∗ = p2∗ = c + t Π1 = Π 2 = t

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  Price  is  equal  to  cost  of  “produc(on  (c)+  transporta(on  (t)”  

 

All  consumers  will  travel  to  either  shop  1  or  shop  2  and  pay   the  price  charged  regardless  of  individual  transporta1on   cost.    Each  seller  enjoys  Local  Monopoly  Power  to  put   mark-­‐up  equal  to  “t”   Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Second Part : Linear City Model •  No,ce  :  We  talk  about  product  differen1a1on,   while  they  are  physically  iden1cal.         •  The  differen1a1on  is  reflected  by  distance  and   transporta1on  cost  (t)  from  consumer’s   perspec1ve.  When  transporta1on  cost  is  higher,   the  products  are  more  differen1ated  for   consumers  !!   •  Horizontal  Produc1on  Differen1a1on  is  about   TASTE    &    ABILITY  TO  SUBSTITUTE   Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Second Part : Circular City Model •  Extension  of  Linear  City  is  “Circular  City”   –   “Fixed  Cost  (f)”  of  Entry  into  the  market/city   –  Circumference  of  the  Circular  City  Model  is   normalized  to  1  unit  (similar  to    Linear  City)   –  Circular  City  Model  accommodate  ‘many  sellers’  to   capture  the  idea  of  brand  prolifera1on  (taste  &   product  differen1a1on.)   Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Second Part : Circular City Model

ASSUME   –  Once  entry  and  incur  fixed  cost,  sellers  are  symmetrically   distributed.  In  fact,  each  firm  has  only  2  real  compeBtors   –  The  city  has  ‘n’  firms.  Distance  between  2  firms  is  ‘1/n’  



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Second Part : Circular City Model

–  Suppose  that,  firm  ‘i’  chooses  price      p    i    .  A  consumer   located  at  distance        x      ∈      [0,        (1/          n    )]          from  this  firm  will  be   indifferent  between  buying  from  it  and  from  its  closest   neighbor  if                                                   pi + tx = p + t[(1/ n) − x] Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Second Part : Circular City Model –  The  demand  of  firm  ‘i’  is  following   p + (t / n) − pi Di ( pi , p) = 2 x = t

–  Its  profit  is  following  

( pi − c) Di − f Again,  this  firm  will  choose  price  to  maximize  his  profit  using   the  same  Nash  Equilibrium  pricing  strategy. Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Second Part : Circular City Model –  To  characterize  NE  price,  we  differen1ate  profit  func1on   with  respect  to      p    i        and  set      p    i    =      p      .     –  The  equilibrium  price  (of  all  firms)  is  following   p =c+

t n

No1ce  :  Profit  margin  decreases  with  ‘n’  (number  of  firms  on  the  city)

–  Number  of  firms  is  determined  by  “zero-­‐profit  condi1on”     1 t ( p − c) − f = 2 − f = 0 n n Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Second Part : Circular City Model –  Equilibrium  number  of  firms  and  price  (of  all  firms)  are   n∗ =

t f

p∗ = c + tf

Note  :  We  will  use  similar  idea  and  methodology  to   study  the  equilibrium  prices  and  existence  of  e-­‐ commerce  market   Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Second Part : Circular City Model •  AGAIN!!    The  differen1a1on  is  reflected  by  distance   and  transporta1on  cost  (t)  from  consumer’s   perspec1ve.  When  transporta1on  cost  is  higher,  the   products  are  more  differen1ated  for  consumers  !!   –  Horizontal  Differen1a1on  :  difference  in  loca1on  is  the   difference  in  taste  and  the  transporta1on  cost  is  the   compensa(on  (ie.  money  or  u1lity)  for  the  difference  in   taste   –  More  firms  on  the  circular  city  induces  closer  distance   between  two  adjacent  firms  and  reflects  “more  similarity”   of  the  product   Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Modeling E-Commerce Market •  We  know       Ø  EC  reduces  cost  of  produc1on  and  exchange,  including   transporta1on  cost   Ø  Market  composes  of  sellers  and  buyers  and  the   equilibrium  prices     •  Seller  must  decide  to  enter  the  market  and  sell   •  Buyer  must  decides  to  buy  and  pay  the  offered  price   •  Equilibrium  price  is  seeled  when  demand  is  equal  to  supply     Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Modeling E-Commerce Market Important  Ques1ons    (incen1ve  &  market  =>  existence    &  equilibrium)   •  If  a  consumer  can  buy  via  EC  with  cheaper  cost  &  price,   why  do  we  s1ll  have  ‘normal  markets’?   •  If  seller  know  EC  will  reduce  his  sale  volume  in  normal   market,  why  do  they  s1ll  invest  in  and  use  EC  as  a  second   channel  ?       •  More  importantly,  what  is  the  difference  in  pricing   strategy  of  a  seller  between  TWO  selling  methods  under   compe11ve  pressure  from  other  sellers?  What  is  the   equilibrium  price  in  each  market  (normal  &  EC)  ?   Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Modeling E-Commerce Market Model  Selng  :  Consumer   –  two  choices  of  shopping  :  Normal  &  EC   –  normal  market  is  circular  city  with  1  unit  length  with   transporta1on  cost  ‘t’   –  ‘N’  consumers  are  equally  distributed  around  city   –  U1lity  from  1  unit  of  product  is    ‘u’   –  In  normal  market,  he  pays  transporta1on  cost  ‘t  x’  ;  where   ‘x’  is  distance  to  the  nearest  seller     –  In  E-­‐Commerce  market,  he  pays  shipping  cost  ‘s’  ;   assuming  ‘s  <  t’   Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Modeling E-Commerce Market Model  Selng  :  Consumer  (con1nued)   –  in  current  technology,  there  is  the  RISK  from  shopping  on   E-­‐Commerce  market  (e.g.  internet  fraud,  difficul1es  of   online  shopping,  security)   –  among  ‘N’  consumers,  each  one  will  decide  where  to  buy  1   unit  of  product  between  normal  and  EC  market  and  each   consumer  has  different  degree  of  subs1tu1on  between   normal  and  EC  shopping.   –  This  degree  of  subs1tute  tells  how  much  reduc1on  in   u1lity  from  buying  the  product  from  EC  market,  denoted   by    θ   i ∈[0,1] Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Modeling E-Commerce Market Model  Selng  :  Consumer  (con1nued)     –  Let      p        denote  price  on  normal  market  and    p        denote  price   e on  EC  nmarket   –  Let              denote  net  u1lity  from  1  unit  consump1on  of   vi consumer   ‘i’  with  degree  of  subs1tu1on                 θi –  Since                                    ,                          means  consumer  ‘a’  is  indifferent   θi ∈n[0,1] = 1EC  shopping,  while                            means   between   ormal  θaand   θb =s0ubs1tute   consumer  ‘b’  thinks  that  EC  shopping  cannot   the  normal  shopping  and  he  has  not  u1lity  from  EC   shopping   Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Modeling E-Commerce Market Model  Selng  :  Consumer  (con1nued)     –   Net  u1lity  of  consumer  ‘i’  from  1  unit  of  product  where  he   chooses  between  two  methods  /  markets  is  following    

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Modeling E-Commerce Market

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Modeling E-Commerce Market Model  Selng  :  Seller  /  Producer   –  a  firm  starts  with  decision  to  sell  in  normal  market  (circular   city)  and  the  charged  price  when  there  are  ‘M’  firms  in  the   equilibrium  entry   –  Ini1ally,  normal  market,  fixed  cost  of  entry  is  ‘F’  and   marginal  cost  of  product  is  ‘c’.  Total  cost  of  selling  ‘q’  units   in  normal  market  is  :  ‘F  +  cq’   –  ASer  entering  the  normal  (circular  city)  market,  a  firm   decides  to  enter  into  EC  market   Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Modeling E-Commerce Market Model  Selng  :  Seller  /  Producer  (con1nued)   –  If  enter  into  EC  market,  firm  ‘j’  pays  fixed  cost  of  having  e-­‐ storefront,  denoted  by    f    j    ∈      [    f  L    ,    f    H    ]       –  selling  on  EC  market  can  save  marginal  marke1ng  cost  per   unit  of  product.    Since      c      =      c%    +        m  %        ,  marginal  cost  of  product   ;(c%< c) on  EC  market  is  just     c%

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Modeling E-Commerce Market Model  Selng  :  Seller  /  Producer  (con1nued)   –  The  cost  structure  of  firm  ‘j’  for  selling  a  product  in  each   method  is  following  

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Modeling E-Commerce Market

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Modeling E-Commerce Market Results  :  Market  without  E-­‐Commerce

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Modeling E-Commerce Market •  Proof  of  Lemma  1  (Equilibrium  without  EC)   –  Follow  the  equilibrium  entry  and  pricing  in  circular  city   model,  but  we  include  the  effect  of  market  size  (number  of   consumers  ‘N’)  in  equilibrium.  

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Modeling E-Commerce Market

–  To  find  the  demand  for  firm  ‘j’,  we  find  distance  ‘x’  that   the  consumer  at  ‘x’  is  indifferent  between  buying  from  two   sellers  surrounding  him  when  there  are  ‘M’  firms  in  the   normal  market  (circular  city)    

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Modeling E-Commerce Market

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Modeling E-Commerce Market

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Modeling E-Commerce Market

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Modeling E-Commerce Market –  The  equilibrium  number  of  firms  and  market  price  in   normal  market  with  ‘N’  consumers  is  following

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Modeling E-Commerce Market Results  :  Market  without  E-­‐Commerce  (Con1nued)

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Modeling E-Commerce Market Ques,on  :  Why  does  equilibrium  price  decrease  when   market  size  increases  (more  consumers  in  the  market)  ?  

Logic    In  circular  city,  if  market  size  (‘N’)  increases,  each  firm  

can  sell  more  and  have  higher  profit.     Ø This  high  profit  aeracts  new  firm  to  enter  the  market.   Then  market  has  more  firms  and  each  of  them  locates   ‘more  closer’  to  each  other.     Ø Distance  between  firms  decreases,  hence  local  monopoly   falls  down  and  equilibrium  price  also  decreases.   Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Modeling E-Commerce Market Results  :  Market  with  E-­‐Commerce   –  If  a  firm  ini1ates  EC  market  by  inves1ng  a  fixed  cost  for   electronic  storefront      f    j  ∈      [    f  L    ,    f  H      ]    ,  some  consumers  with   high  level  of  product  subs1tu1on  will  migrate  to  EC  and   leave  the  normal  market   –  So  there  is  a  level  of  market  subs1tu1on    θ        ∗    at  which  the   consumer  is  indifferent  between  two  methods  of  shopping   –  Consumers  with  higher  degree  of  subs1tu1on      θ    ∗      ≤    θ      i    will   buy  in  EC  market  and  ones  with  lower  degree  θ      k    <      θ      ∗      buy   from  stores  in  normal  market Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Modeling E-Commerce Market

–  Number  of  consumers  buying  in  normal  market  decreases   =>  Some  sellers  will  go  out  of  business   –  We  need  to  reconsider  the  equilibrium  price  and  number   of  firms  in  normal  market  and  also  recover  equilibrium   price  in  EC  market   Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Modeling E-Commerce Market –  When  we  have  EC  market,  number  of  consumers  in  normal   market  is    θ ∗ N –  We  use  the  same  method  to  find  equilibrium  price  in   normal  market  (circular  city).  The  profit  maximiza1on  of   firm  ‘j’  is  following  

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Modeling E-Commerce Market

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Modeling E-Commerce Market

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Modeling E-Commerce Market •  If  there  is  a  firm  to  ini1ate  EC  market  (launch   electronic  storefront  to  sell  online),  it  must  be  the   firm  with  lowest  fixed  cost  (  f    L    )   •  When  there  are  more  than  one  firm  selling  in  EC,   each  firm  has  equal  market  share  of  total  consumers   in  EC  market    (  (1      −    θ    ∗  )N        )   •  Consumers  in  EC  market  pay  the  same  price  and   equal  shipping  cost  (‘s’)  in  all  EC  seller Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Modeling E-Commerce Market •  To  find  the  size  of  EC  market,  we  need  to  discover  θ      ∗ ∗ θ •  We  find  it  by  using  the  fact  that  consumer  at               would  be  indifferent  between  two  methods  of   buying.  His  net  u1lity  from  each  method  is  equal  

v EC = v Normal

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Modeling E-Commerce Market

–  This  is  the  total  demand  in  EC  market  to  be  shared  by  all   EC  sellers.     –  Suppose    the  number  of  EC  seller  is    ‘g’   Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Modeling E-Commerce Market •  The  profit  maximiza1on  of  EC  seller  and  its   necessary  condi1on  to  set  online  price  are   following

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Modeling E-Commerce Market

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Modeling E-Commerce Market ⎛ m%− s ⎞ Since,    m  %      >    ⎜          2          ⎟      the  EC  price  is  lower!!   ⎝ ⎠

•  To  find  the  EC  market  share  (θ    ∗  )  and  the   minimum  market  size  (‘N’)  to  have  both   normal  and  EC  market  together,  we  consider   the  non-­‐zero  profit  condi1on  of  the  seller  with   lower  online  fixed  cost    ( f L ) Kaipichit Ruengsrichaiya (c) Copyright NOT Allowed To Copy & Distribute

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Modeling E-Commerce Market

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Modeling E-Commerce Market

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Modeling E-Commerce Market

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Modeling E-Commerce Market

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Modeling E-Commerce Market

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Modeling E-Commerce Market Effects  of  E-­‐Commerce  on  Product  Market  :   Both  Normal  and  E-­‐Commerce  Markets  

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Modeling E-Commerce Market

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Modeling E-Commerce Market Another  Important  Result  :  Comparing  Prices,   EC  Market  improves  economic  efficiency  !!  

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Empirical Evidence & Support

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Empirical Evidence & Support

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Empirical Evidence & Support

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Empirical Evidence & Support

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Empirical Evidence & Support

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ank you

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