The Impact of the Internet on Market Structure

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THE IMPACT OF THE INTERNET ON
MARKET STRUCTURE

Bruno Cassiman**
Sandra Sieber**

RESEARCH PAPER No 467BIS
July, 2002

* Professor of General Management, IESE
** Professor of Information Systems, IESE

Research Division

IESE
University of Navarra
Av. Pearson, 21
08034 Barcelona - Spain

Copyright © 2002, IESE
Do not quote or reproduce without permission

The PwC&IESE e-business Center is a joint initiative of IESE Business School and the professional services firm PricewaterhouseCoopers aimed at creating a Research Center to analyse the impact of e-business on organizations.

The mission of the PwC&IESE e-business Center is to be an international benchmark for companies and universities in the development and communication of new ideas.
Based on this mission, the Center has set itself five basic goals: 1)

Gather material on “best practices” and “next practices” in e-business.

2)

Develop a conceptual framework that will help enable the world of business to understand and control the impact of the Internet and e-business.

3)

Diffuse the knowledge generated by research in this field through the usual scientific and professional media.

4)

Develop high quality, up-to-date teaching materials.

5)

Help train managers to understand the complexity of the changes that technology brings about in society and in the way businesses and competitive advantages are developed.

These goals will be achieved through three activities: research, training, and communication. The Center’s efforts will be focused primarily on research, as the foundation for training and communication of the results obtained.

THE IMPACT OF THE INTERNET ON MARKET STRUCTURE

Abstract
The arrival of the Internet offers new opportunities for value creation. The new technology simultaneously affects demand and cost structures, leading to a radical transformation of existing market structures. Appropriation of the value created has, therefore, become more challenging. Furthermore, as the Internet impacts industries in several ways simultaneously, we find that simply analyzing the effect of the Internet on pricing behavior and price dispersion misses the point that whole industries are being transformed, which clearly affects the pricing power and possibilities of individual firms. In this paper we provide a conceptual model for analyzing the different elements within the dynamics of industry transformation, and for understanding the impact of the Internet on market structure. We illustrate the different concepts with real-life examples.

Key words: Internet, Value creation, Value appropriation, Pricing, Market structure.

THE IMPACT OF THE INTERNET ON MARKET STRUCTURE

1. Introduction
The Internet affects conventional competitive strategies in at least three different ways: 1) the greater efficiency generated by lower transaction costs and new organizational forms reduce the firm’s cost structure; 2) the reduction of the consumer’s search costs and new opportunities for product differentiation and redefinition affect the consumer’s willingness to pay; and 3) electronic markets affect pricing and allow new pricing mechanisms.

The Internet is an enabling technology (Porter, 2001) that has allowed companies to influence both their demand and their costs at the same time, creating what Kim and Mauborgne (1997) call “value innovations”. New entrants or incumbents have been able to radically reposition themselves within an industry, critically affecting the existing industry structure. This has triggered a competitive response which will lead to a new equilibrium in transformed industries. Therefore, as the Internet simultaneously affects demand and cost, simple comparative statics exercises are unlikely to provide much insight into the effect the Internet is having, as in many cases the market structure has been radically changed. In the financial services industry, for example, brokerage has been completely...
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