Computers in Management. Oct. 3, 2006. Network Effects, eBa

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MI021 / CS021Computers in Management

• Oct. 3, 2006
• Network Effects,
• eBay case,
• W.R. Hambrechts OpenIPO
• www.gallaugher.com

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Issues Covered

• Network Effects
• Defined
• Characteristics of markets competition when
  present
• Examples
• Auction Models
• liquidation vs. market efficiency auctions
• Priceline vs. eBay
• eBay case growth, comp. adv., and challenges
• IPO markets struggles of WR Hambrecht

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Understanding Network Effects (a.k.a. Network
Externalities, Metcalfes Law)
buyers

• When present, product or services become more
  valuable as its installed base expands.
• Why? Users crave
• Exchange opportunities
• Stability
• Extrinsic Benefits
• Characteristics Early competition, bandwagons,
  monopolistic tendencies
• Best products dont always win.

sellers
Users (Windows, PS2)
Developers (programs, game titles)

• Effect on innovation
• Lowers competition with established standard
• Increases innovation within standard

members
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Auction Formats
Liquidation Auctions (e.g. Priceline)
Seek lowest price on widely available goods and
services
Seek first to maximize existing channels reduce
inventory
suppliers
customers
disincentives to use auction shrink supply over
time
Market Efficiency Auctions (e.g. eBay)
Auction format is favored over the inefficiency
of existing channels
Seek access to unique / rare products or services
suppliers
customers
incentives to use auction increase supply over
time
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Leading Global Retailers
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Shop, Buy/Transact, Communicate Search, Be
Entertained
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Dependent on paid natural search
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IPO Inefficiencies
pays a 7 fee
45/share
27/share
small Investors
Institutions large investors
Underwriting syndicate
small Investors
The Firm
small Investors
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