Chapter 27: Problem 14

Amazon.com was the first mover in online book sales. It patented the one-click purchasing system. Barnes \& Noble was a later entrant with bn.com. Is this a battle with a "winner takes all"' outcome? Why or why not?

Short Answer

Expert verified

In a "winner takes all" market, one competitor dominates the entire market share and profits, leaving little to no space for other competitors. Factors that contribute to this include strong network effects, high customer loyalty, and high barriers to entry. However, in the competition between Amazon.com and Barnes & Noble, these factors are not strong enough to result in a monopolistic outcome. Network effects in online bookselling are not strong enough to prevent competition, customer loyalty can be influenced by differentiating services, and barriers to entry in the market are not extremely high. Both Amazon and Barnes & Noble can thrive by catering to various customer segments and offering unique services, meaning a "winner takes all" scenario is unlikely in this case.

Step by step solution

Understanding "winner takes all" markets

In a "winner takes all" market, one competitor dominates the entire market share and profits, leaving little to no space for other competitors. This outcome usually happens when there are strong network effects, high customer loyalty, and high barriers to entry in the market.

Network effects in the online bookselling market

Network effects occur when the value of a product or service increases with the number of users or customers. In the case of online bookselling, network effects can come from user reviews for books, specialized algorithms to provide personalized recommendations, and widespread brand recognition. However, these network effects are not strong enough to create monopolistic effects since other companies can offer similar customer experience and readers can easily browse multiple websites for book reviews and recommendations.

Customer loyalty in the online bookselling market

In the context of online bookselling, customer loyalty could be achieved by providing better prices and a wider range of books, a more user-friendly platform to browse and purchase books, and exceptional customer service. Amazon may be a first-mover and have pioneered the one-click purchasing system, but Barnes & Noble could still potentially differentiate itself by offering more personalized and localized content, such as featuring local authors and hosting book events. This proves that while customer loyalty might be influential, it is not an insurmountable barrier in the competition between the two companies.

Barriers to entry in online bookselling

High barriers to entry could prevent new competition from entering the market, leading to a "winner takes all" scenario. However, online bookselling does not have extremely high barriers to entry. True, Amazon has created technologies that make it easier for customers to purchase books, but with the rapid advancement of technology, competitors can catch up and develop similar systems. In addition, both Amazon and Barnes & Noble rely on similar supply chain partners, so gaining access to the books is not a particularly high barrier to entry.

Conclusion

In conclusion, while Amazon.com and Barnes & Noble are big competitors in the online bookselling market, a "winner takes all" outcome is not likely because the network effects, customer loyalty, and barriers to entry are not strong enough to result in a market monopoly. Both companies can thrive by differentiating their services and catering to various customer segments.