The e-business environment is placing growing emphasis on the digitalization of product and service offerings, creating a set of economic conditions that differ from those characterized by physical products. Suppliers need to compete not only on overall quality but also on “information age strategies” that can prevent them from falling into acompetitive trap where they cannot recover their costs. Versioning, confounding, networking, and pricing are needed to compete effectively, but these strategies often give rise to paradoxes from the buyer’s perspective. Thethinking manager can use the guidelines offered here to manage their e-business offerings more effectively.
the past few years have seen a number of debates over whether e-business requires new or different thinking about business and strategy. Regard-less of the various views, the reality is that contemporary information technologies (ITs) are facilitating rapid digi- talization, storage,and transfer of product and service experiences. This will not abate. So a productiveexercise is
to examine business strategy by looking at the economic
impacts of digitalization. Here we try to take a step back
and reexamine the dynamics of e-business and its poten-
tial impact on the economy from fundamental andenduring economic principles.
Our aim is to provide managers of enterprises in this digi-
tal age with guidance on key factors that will have a con-
trolling effect on the likely evolutionary path of e-busi-
ness. Moreover, these controlling factors will affect the
balance of power between market participants, specifi-
cally, suppliers and entrepreneurs on the one hand and
consumers on the other. We conjecture that the evolution-
ary path and the balance of power are intimately linked
and will result in a precarious economic balancing act—
precarious in the sense of generating huge benefits for the
economy as a whole, but with the potential to initiate
large swings in the division of those benefits between
buyers and suppliers. As such, managers of companies
that digitalize their offerings or use today’s Internet and
other networks for business have a compelling interest to
comprehend the new economic reality and leverage it to
their respective advantage. The failure to do so can have
dramatic negative consequences for the complacent party
the common theme in all these paradoxes is read-
ily apparent as suppliers use IT in an informa-
tion-intensive environment to generate premium
prices unlinked from costs. Many of these strategies are
not new and not even rare. However, they are becoming
more and more feasible in an e-business environment.
The thinking manager who appreciates the economics of
digits can find the underlying rationale useful in viewing
e-business and competition. By engaging in versioning,
confounding, network effect leveraging, and predatory
pricing strategies, suppliers are not necessarily doing any-
thing illegal but are attempting to survive and thrive in an
environment in which the conventional competitive equi-
librium is unpalatable. Strategies to raise prices in the face
of intensive competition and lower barriers to entry
become the only viable options.
It is important to note that these strategies are particularly
useful in evaluating pure plays that have digital products
(news), places (websites), and processes (buying). How-
ever, we believe these arguments are useful for firms that
provide any kind of digital experience to customers. While
physical products themselves are not subject to digital
economics, information about their characteristics, config-
uration, operation, selling, support, and so on is, thereby
allowing consideration of versioning, confounding, net-
work effects, and pricing strategies.
Intervention due to antitrust issues, consumerism, and
market forces might inhibit the use of some of these
strategies. Regulatory and antitrust issues might come into
play when supplier actions (a) are predatory and involve
proactive leveraging of market power in order to drive
competitors out of business and (b) impinge on personal
privacy as advocated by consumer groups. The infomedi-
ary Google is currently under intense scrutiny by Google-
Watch.org, a nonprofit group dedicated to informing the
public about the search giant
’
s inner workings, particu-
larly as it relates to bias in its indices and privacy. More-
over, companies like Epinions focus on reducing con-
founding information on products by providing unbiasedcomparison services. However, it is our contention that
firms that are not vigilant in developing an infomediary,
personalization, profiling, segmentation, pricing, and
bundling approach to their digital offerings will not suc-
ceed. In the milieu of the Web, the quality of a firm
’
s
offering is paramount, but so are the information age
strategies needed to prevent competitive demise.
We are in the midst of an e-business battleground with
three major sets of players: buyers, suppliers, and regula-
tors. Suppliers typically have greater IT capitalization, but
face new economics of digital costs. This makes it impos-
sible for them to compete at marginal costs approaching
zero in a highly competitive environment that demands a
higher infusion of fixed costs. Therefore, they must engage
in ways to reduce the competition despite a growing buyer
ability to shop and compare products. Versioning, con-
founding, leveraging network effects, and pricing strate-
gies are four complementary ways to leverage their IT cap-
italization to do this. It is good economic sense.