Study

on EComm
erce
compa
nies to
unders
tand
Oligop
oly
market
s

BOE PROJECT

Submitted by:
Ratika Gupta
PGDM20160050

INTRODUCTION

The study of electronic commerce can be viewed from

various perspectives. From a communication perspective, ecommerce is the delivery of information, products, and services and the payment for these
over telephone lines, computer networks, or any other electronic means. From a business
process perspective, e-commerce is the application of technology toward the automation of
business transactions and workflow. From a service perspective, e-commerce is a tool to cut
service costs while improving the quality of goods and increasing the speed of service

delivery. From an online perspective, e-commerce provides the capability of buying and
selling products and information on the Internet and other online services.
This project considers electronic commerce as the process of buying, selling, or exchanging
of products, service, and information by various agents via computer networks including
Internet. As such one can study the structure and mechanism of electronic commerce from an
economic perspective. In electronic commerce setting, a new market order has been
realizing. However, one can recognize many similarities in the structure of this new market
with those of pure competitive market described in microeconomics. Consequently, this
market setting may foster a perfect competition and thus market equilibrium in a classical
economic sense. This section examines the components of electronic commerce market
setting and the characteristics of this market.

What is an Oligopolistic market?

An oligopolistic industry is the one in which there exist few suppliers such that the
change in output and price of any individual firm will affect others. Consequently,
other firms will react to price/output changes initiated by one firm. Usually, firms in an
oligopolistic industry produce and sell differentiated products. Although goods sold in this
market have high cross elasticity of demand and are substitute for each other, the product of
each firm has its own characteristics either real or fancied to consumers such that the firm can
carve its own market niche.
The interdependence of suppliers in an oligopolistic market has impact on output and pricing
of individual firm. Depending on whether a firm can predict the reaction to changes in price
and output of other firms in the market, the individual supply curve will be determinate with
some degree of accuracy or totally indeterminate. Generally, the oligopolistic can have some
certain influence to the demand curve faced, its price, and its output. The oligopolistic
industries could be classified according to the degree of collusion among firms as this
collusion has effect on pricing mechanism.
In the short run, perfectly collusive oligopolistic firms establish the price and output for the
whole industry. In industries characterized by independent actions of individual firms,
generally there exist price wars. As the industry matures, the relation among firms becomes
collusive. The price may become rigid as existing firms try to avoid a price war. However,
the firm of particular oligopolistic industry may engage in non-price competition such as
advertising and product differentiation.
In the long run, the firm can adjust its plant to any desired scale and new firms can enter the
industry if it is not blocked. The chosen scale of plant will produce the planned output at the
least possible average cost. The existing collusion may block the new entry in order to enjoy
long run profits.

INFRASTRUCTURE OF THE ELECTRONIC COMMERCE

MARKET
Infrastructure of electronic commerce is network communication and computing via Internet.
In this network, users can access and process information that is stored in remote places. In
addition, they can communicate with other users from their personal computers. Information

technology (IT) applied in electronic commerce helps reduce the buyers costs associated
with transaction such as searching for products, suppliers, and comparison across offers. It
effectively helps matching consumers preference with sellers offer. As such electronic
commerce makes the business transaction more efficient as it maximizes the utility of
consumers (individual consumers as well as firm-buyers) and thus reduces market friction.
It has been noted that if the cost of searching is expensive, consumer has a tendency to pay a
relatively high price for the first available product or service (reservation price). However, IT
in electronic commerce provides timely and comprehensive information to the consumer in
order to reduce the uncertainty in making choices across products and suppliers. In addition,
IT also provides information about the substitute and also the possibility to customize the
product to the consumers specific need and therefore incurs a lower cost and higher utility.
The efficient, free, and complete flow of information in the electronic commerce provides
consumers as well as suppliers the value of the product as it is perceived from the other party.
This helps the market mechanism become more efficient as it reduces the opportunistic
behavior in conducting transactions.
While transactions are conducted through electronic channel, the transportation of products
and services may be in traditional physical delivery channel such as ground delivery, and/or
digital channel such as downloading digital products.

PRODUCTS
Traditional physical goods generally have a physical, tangible presence, e.g., a printed
newspaper. Traditional service products involve the performance of a task for a customer,
e.g., a movie session in theatre. In electronic commerce, the distinction between products and
services is not always easy to define, e.g., online newspaper offered on the Internet. The key
issue in electronic commerce is not to classify a product as a good or service, but to define
the attribute of the good or service that can be offered on the Internet and the corresponding
benefits that it provides to the consumer.
The main difference to traditional transaction is that products and services offered in the
electronic commerce market could be digitized and delivered via the electronic channels.
These digital products require minimum or even no inventories and warehouse. Selling these
products and services do not require physical front-stores. Consequently, most of the costs are
fixed and the variable cost is very small.

Game Theory and Oligopoly

A difficulty in evaluating the behavior of firms in oligopolistic industries is that there
a number of alternative theories of quantity- and price-setting strategies that the firms
may adopt. Game theory examines alternative strategies and tactics that
interdependent firms may utilize in an attempt to maximize their profits.

From the Prisoners Dilemma to the Price Game

In game theory, the classic prisoners dilemma game can indicate the reasons for the price
war broke out. Prisoners are as follows: Police arrest two suspects: A and B, but there is no
enough evidence for a conviction. So following the separation of the two men, the police
offer them the same choice: If one man betrays his partner, while the other remains silent, the
betrays will be immediately released, and the silence will jail for eight years; if two people
are silent, they would sentenced to imprisonment for 1 year; if two people at the same time to
confess, they would sentenced to imprisonment for five years.. In this case, there are usually
two results: cooperative and non-cooperative, cooperative is collective rationality, noncooperative game assuming rational individual participants, pursuing individual reward.
In order to expand market share, two companies have two choices: keep price or lower price,
and repeat it. From the market perspective, the consumers welcome to price competition. It is
no exaggeration to say that most consumers like low-priced. Because of the enormous
influence of the enterprise market share, price-fixing cartel is no sufficient binding. If one of
them began to cut price, it makes price agreements bankruptcy. To purse maximize interests,
each company does not have the power to maintain the agreement. This is a rational choice
between individual and group, which particularly reflected in the price war. Price competition
oligopoly firms often find themselves in a prisoners dilemma. If others do not cut price, we
use low-priced to capture the market; if others cut price, we must cut too. Although, like a
prisoner, all companies know the result of collusion is better, but they worried partner will
defaults, so it is easy touch off a large-scale price war. Any company can come up with a
zero margins stunt to increase sales and expand market share. So companies have to cut
price in order to meet the challenge, thereby they break up the balance of its original price. It
makes everyone in this war fall into a price trap (of course, we only consider they cut the
price of its terms, except for price war fraud).

Nash Equilibrium and the Price War

In the traditional prisoners dilemma, we know that (cooperative, cooperative) is the only
Nash equilibrium, while the price of the online retailer for the above game, there is also a
unique Nash equilibrium (low-priced, low-priced), which calls sub-game perfect Nash
equilibrium strategy. Since the sub-game perfect Nash equilibrium with consensus estimates,
that is the actual behavior of each players choice consistent with their predictions, so the
prisoner would choose to be honest, oligopolistic firms will choose low-priced. We can
determine the outcome of the online retailer war is Nash equilibrium, and it is stable.

Oligopoly and Interdependent

Pricing
A dominant strategy is one that yields the highest payoff for a firm irrespective of the
strategies pursued by other firms. A collusive strategy is one in which firms
coordinate their production and pricing to share in maximized total industry profit

Network Externalities
A. Product Demand in the Absence of Network Externalities
Without externalities, the demand for a firm's product is governed by the standard law of
demand. As the market price increases, the quantity demanded declines.
B. Product Demand in the Presence of a Network Externality
1. Product Demand with a Network Externality
The products of firms in network industries are subject to network externalities. This
means that more consumers purchase the product when others also buy it.
2. Implications of Network Externalities for Product Demand
When more people desire to consume a product as others do, their willingness to pay
for a unit of the product increases. The result is an increase in the demand for the
product. In addition, the price elasticity of demand for such products typically
declines.

Network Industries and Electronic

Commerce
A. Network Externalities and Market Feedback
1. Positive Feedback in Network Industries
When a network externality is present that results in a positive market feedback, there
is a logrolling effect that leads to an increase in demand as a firm's or industry's
product catches on.
2. Negative Feedback in Network Industries
If a firm's or industry's product becomes a has-been, then there is negative market
feedback, and demand for the product declines.
B. Other Important Characteristics of Network Industries
1. Issues of Complementarity and Compatibility
Products of some firms in network industries may emerge as standard products, or
items that producers of complementary products regard as the most widely used and,
hence, most important for purposes of assuring compatibility with their
complementary products. Becoming a standard product can reinforce positive market

feedback for firms in network industries already enjoy, and failing to emerge as a
standard product can be a source of negative market feedback for these firms' rivals.
2. Switching Costs and the Potential for Consumer Lock-In
Consumers of products of network industries may confront sizable explicit and
implicit opportunity costs of switching to alternative products. Consumer lock-in
occurs when the switching cost associated with consuming an other than the product
of the network industry exceeds the perceived benefits from such a switch. This can
further reinforce positive market feedback for certain firms in network industries.

E-Commerce Companies in India

and Oligopoly (Considered
Flipkart)
India is one of the high growth developing countries set to make major gains in the near
future. One of the booming sectors in India is ecommerce, set to hit $56 billion within ten
years.
As we all know, ecommerce in India is on a very steep upward trend. Something that is
similar to the IT Explosion that surfaced in the country a decade and a half ago. With dizzy
valuations, most of the players in the Indian ecommerce market have carved an
oligopolistic environment with extremely high entry barriers. One may say, with
technology getting cheaper by the day the entry barriers will slowly be erased, but reality
check of the Indian Ecommerce industry would tell you that its more about logistics than
technology that would make you call the shots in the market.
India is a very conservative market at the very foundation. No matter how welcoming the
market has been towards innovation and technology, the decision making process is still
diluted with apprehension. Flipkart has been able to understand the apprehension and has
addressed them in a manner that none of its peers in the market can claim to have mastered.
Indians want certainty and minimum risk. The average Indian is willing to travel the extra
mile if he is provided an opportunity to minimize risks. The offspring of this understanding
are schemes/concepts like Cash on delivery, which was an industry first and other schemes
like 30 days return and same day delivery, which were a country first. Did that change the
mind of the buyer? It absolutely did and it was something none of the other players in the
market could flaunt confidently. Though this would seem an exaggerated statement, Flipkart
can resonate with online shopping in India similar to what XEROX had done to the
Photocopy industry in India.
But coming back to my topic, exclusivity seems to be the next mighty weapon in Flipkarts
arsenal. We all know the advantages the seller has by selling his offering on Flipkart. Without
explaining the intricacies, the major advantage can be comprehensively called cost
minimization. This is not an Industry first but it definitely is a first for a tech company in
India to sell a product only on the online platform and that too on an exclusive eTailer. In fact

Flipkarts website crashed multiple times due to exceedingly high and unexpected web
traffic!
Exclusivity seems to work very well in Flipkarts favour. It has definitely helped them
increase their web traffic, which does not translate directly to sales, but the fact that they are
able to break the clout and create an identity which more or less gets a strong demarcation
from the rest of the competition makes this strategy of theirs a masterstroke. The easiest way
to break the Indian ecommerce market into smaller fragments would be, Flipkart and then,
the rest of the players. It is really commendable and at the same time educating, that markets
are distinct and thereby success in one does not guarantee success in another. In the previous
statement I was referring to Amazon, arguably one of the most experienced eTailer in India
and across the world. They have virtually led innovation through thought leadership, and they
had set the benchmark for markets across the world when it came to evaluating participants in
the ecommerce space. But it looks like Flipkart is leading the pack in the Indian market, and
that too by a sizable margin.
Flipkart is the only player as of now in the Indian market to sell products of companies which
have their base abroad (other than the One Plus Amazon tie-up), but if we were to look at
other ecommerce players, we can see them sell the idea of exclusivity by marketing Indian
brands. The latter is not a challenge since those brands already have an inventory and
logistics system in place, but Flipkart set the ball rolling for companies like Motorola and
Xioami from virtually nothing from a logistics or inventory management standpoint.
Hindsight we can definitely say that the combination of Brand Flipkart and their relentless
investment in technology and logistics has negated the chance of probable replication by
other players, had they been approached by the multinational OEMs instead of going the
Flipkart way.
Now for the marketing, and how single source actually makes the numbers astronomical. A
small analogy I can think of is, if we were to store water in several smaller containers and
store the same amount of water in one large single container, the larger container is generally
more intimidating. Thats human psychology. Similar has been the case in case of Flipkarts
exclusivity. The numbers posted by sales of Mi3 in India is miniscule if we had to aggregate
the rate at which budget smartphones are sold in the same timeframe all over India. Its how
they have scripted the concept that has sealed it in favour of Xioami and Flipkart. Exclusivity
means nothing spectacular to me as a customer, since Ill eventually pick up the product from
the available sources. For the company though, it has got massive data to study all its
customers in a country, so they know what works and what doesnt. So exclusivity is
extremely beneficial to the seller. But One thing exclusivity does to customers is it eliminates
price variability. With one exclusive seller theres no reason to resort to competitive price
wars. So as a customer my dilemma is eliminated, since I know the price will be the same
whether I buy it today, or tomorrow or even next month. The best example is Moto G. It had
a price cut only when the 2nd generation of the devices where scheduled to arrive, so the
price cut was with an intention to clear stock.
Without dwelling too much on Flipkarts success, lets switch focus to the perils of
exclusivity and how its a trap that will dent me as an eTailer in the long run. Today Flipkart
can be the exclusive seller of Moto G, which was a major success, and moreover Motorola is
a known brand in India. But in case of Xioami, despite their success in China, they are still
relatively a new brand in India. So for Indians, we go by Flipkarts assurance and not
Xioamis. If you would like to contest my statement, let me ask you if you would invest in

any other Chinese brand, or even a Xioami if it were to be sold in a retail store? The answer
would lean more towards a No than a Yes. So thats what Flipkart does, it adds that extra
bit to the brand Xioami, that makes it worthy investment in the eyes of the Indian consumer.
Flipkarts branding is virtually leased by these companies. Yes they have their own reputation
to stand their own, but they need Flipkart to give that massive thrust to gain acceptability
quickly.
When we looked at smartphones sold exclusively by ecommerce players (other than Flipkart)
in India in the recent past, it doesnt provide any leverage to lean for the OEMs in terms of
value addition/creation. Thats because the other eTailers just dont have the brand pull (as
much as Flipkart) to successfully endorse an unknown brand. Thats the power of brand
Flipkart! But if Flipkart experiments with sellers like it has done with Xioami on a regular
basis, then there are chances that Flipkart may be the research paper topic for several BSchools; looking to publish papers on Branding Catastrophes. If we look at the number of
negative feedback about the Xioami product, attributable more towards their limited stocks
hindering replacements than the product itself, then its just the tip of the iceberg of what may
fall upon brand Flipkart in the times to come, if they dont choose their partners wisely. Its
extremely profitable to engage in such partnerships but Flipkart needs to safeguard its brand
first and foremost, especially after the way it has redefined and lead eTailer valuations in
India. The likes of XIOAMI may come and go but Flipkart will have a brand to safe guard in
order to maintain its position if not surpass it in the future. Their branding is an offspring of
their competitive advantage, but taking their brand for granted and providing a platter to
unknown Chinese OEMs may prove fatal to the Brand, which arguably is the most famed
poster boy of Indian ecommerce.

CONCLUSION
Ecommerce today is an oligopoly, a robbery with willing victims."