Internet-based Firms Research Articles

How need for closure and deal proneness shape consumers’ freemium versus premium price choices

Internet-based firms extensively use freemium pricing strategies to thrive in the hyper-competitive e-marketplace (e.g., Spotify, Tinder). Yet many firms using this pricing strategy operate at a loss. Few studies have theorized whether consumers’ decision to pay for the premium subscription is contingent on their individual traits. In response, this study posits that need for closure and deal proneness explain consumers’ decisions to choose free versus premium pricing options. We test our predictions using one survey and one experiment. Study 1 shows that need for closure prompts consumers to pay for the premium subscription. Moreover, deal proneness negatively moderates this relationship. Study 2 finds that uncertainty reduction mediates the effect of need for closure on the decision to pay for a premium subscription. These findings have important implications for managers aiming to increase conversion rates from free to premium subscriptions.

Reverse channel selection decisions with a joint third-party recycler

In recent years, Internet-based firms have been increasingly engaged in recycling used products, taking advantage of economies of scale by serving a number of manufacturers. However, most studies on the recycling channel of remanufacturing to date only consider the case of a single manufacturer in a closed-loop supply chain. To address this gap, we develop a Stackelberg game model and show that the joint third-party (J3P) collection mode serving multiple manufacturers may outperform individual retailer- and manufacturer-managed modes, as opposed to existing findings considering a single manufacturer. It is optimal for manufacturers to authorise a large-scale J3P to collect used products. In addition, we show that the J3P can design a two-part tariff contract for the manufacturers to overcome the double marginalisation and collective action problems in decentralised supply chains. Our results provide guidance for enterprises and the government on recycling decisions in the era of a network economy.

The Sharing Economy Globalization Phenomenon: A Research Agenda

Abstract Sharing economy firms have been able to achieve global levels of success at an unprecedented pace. In this study, we focus specifically on internet-based firms that allow rent appropriation from temporary utilization of underutilized assets. By looking at these firms' main characteristics and the current dynamics revolving around their internationalization process, we develop a framework to guide future research drawing from a business ecosystems perspective. The business ecosystem approach is a promising theoretical lens to assess this phenomenon due to its more holistic view of multisided network effects and multiple stakeholders' participation that can vary across nations. We note that the sharing economy phenomenon has spurred worldwide adoption of platform businesses which, in turn, creates a great opportunity for future research to extend current theories by exploring why, when, and how these firms expand into new countries. We argue that further research on sharing economy firms and its interactions with different national ecosystem configurations can provide important insights to theory as well as relevant information to managers and policymakers.

Multisided Platforms, Dynamic Competition, and the Assessment of Market Power for Internet-Based Firms

Market power on each side of a multisided platform, whether in the form of increasing prices or decreasing quality, is constrained by the risk of losing sales on the other sides. That tends to weaken market power on each side and encourages platforms to keep prices lower and quality higher than they would absent these feedback effects. In some cases the nature of the business model, and competition, result in the platform allowing one type of customers to participate in the platform for free or even to subsidize their participation. Non-price methods of attracting customers are especially important in this case, particularly when the business model adopted by the industry makes it difficult for platforms to move from free participation. To provide a reliable assessment of competitive constraints, market power analysis must consider the interdependencies in demand by the participants on the platform as well as have heightened focus on non-price competition when the participation for one group is free. Market shares should be used cautiously in assessing market power for multi-sided platforms, especially when they reflect only one side of the platform, and therefore do not account for the interdependent customer groups, or concern a free platform side where there is no monetary measure of value. Finally, dynamic competition makes the analysis of market power complex because it results in feature competition, and potentially drastic innovation, on one side of a platform that has feedback effects on the other side of the platform. The courts and authorities have recognized these points in Qihoo 360 v. Tencent, Cartes Bancaires v. European Commission, the Facebook/WhatsApp merger, and the Microsoft/Skype merger. These principals should become part of the standard analysis of multi-sided platforms by courts and competition authorities globally. These concerns are illustrated in the context of multi-sided platforms that offer online services where free services and dynamic competition are especially important.

New Conglomerates and the Ecosystem Advantage

It is the purpose of this paper to explore the emergence of a new form of web-based company and how the new organisational form is able to access multiple-markets and industries by exploiting the benefits of a platform ecosystem business model. Internet-based companies such as Amazon, Google, Facebook and Apple were referred to as the “Gang of Four” in May, 2011, by Eric Schmidt, Executive Chairman of Google. These twenty first century companies are leading an Internet-based consumer revolution which is having a disruptive impact on a broad range of industries and markets. Using their platform-based ecosystems (Gawar, 2009), the Internet-based corporations are able to leverage these core competencies and enter industries that appear unrelated to their core businesses. This has given rise to a new form of conglomerate business model that contrasts with the Western industrial conglomerates of the 1960s and early 1970s. Most of these corporations were broken-up in the early 1980s and the remaining core businesses resorted to focused strategies. The paper also analyses why the new Internet-based firms do not follow the positioning school of strategy and seek monopolistic rents – profits arising from market power - (Porter, 1979) by locating in attractive industries. Instead, these firms leverage core competencies and achieve Ricardian economic rents (Grant, 2008) – profits arising from superior resources - through strategies of stretch and leverage (Prahalad and Hamel, 1990). By adopting a core `competency tree` configuration (Prahalad and Hamel, 1990), a core competency platform is leveraged which allows the Internet-based firms to enter multiple markets using asset-light business models. This new form of competitive advantage is based on having a superior ecosystem that uses data as the key resource instead of capital; capital being the main resource underpinning the success of the traditional Western conglomerates of the 1960s and early 1970s.

Cash crisis in newly public Internet-based firms: an empirical analysis

This study examines why, even when financial resource constraints are significantly relaxed, some new ventures struggle to survive while others prosper. Using the data of approximately 200 new Internet ventures that went public during the years 1997 through 1999, we propose that the performance of new ventures is a function of pre-initial public offering (IPO) characteristics. We determined that firm-level characteristics, including top management team (TMT), financial position, networks, and location, are related to the performance of struggling new ventures. We found strong evidence of agency relationships, so that a substantial reduction in equity holdings by the entrepreneurial team is a strong signal of impending crisis. Interestingly, similar reductions by venture capital (VC) backers did not serve as a signal of crisis.

Explaining the E-Commerce Shakeout: Why Did So Many Internet-Based Businesses Fail?

In the years 2000 and 2001, almost 800 Internet-based firms went out of business. Consistent with the management literature on organizational failure, factors that contributed to the collapse of dot.com firms were either internal (e.g., poor strategic planning, inexperienced management, inactive board of directors) or external (e.g., lack of available resources and marketplace competition). Short case studies of two recent dot.com closures reveal that they did not fail for any one reason but for a combination of reasons. Not surprisingly, 31 dot.coms that had either gone public or were about to go public before they failed were young, small to medium sized, had never made a profit and were likely to run out of cash in just over a year's time. Contrary to popular belief, the chief executive officers of failed dot.coms were middle- aged and well educated. Boards of failed dot.coms were small and had less outside representation than customary. A majority of failed firms were founded by more than one individual.

The Efficiency of Equity-Linked Compensation: Understanding the Full Cost of Awarding Executive Stock Options

To properly align incentives using equity-linked compensation, the firm’s managers must be exposed to firm-specific risks, but this forced concentrated exposure prevents the manager from optimal portfolio diversification. Because undiversified managers are exposed to the firm’s total risk, but rewarded (through expected returns) for only the systematic portion of that risk, managers will value stock or option-based compensation at less than its market value. This paper derives a method to measure this deadweight cost, which empirically can be quite large: managers at the average NYSE firm who have their entire wealth invested in the firm value their options at 70% of their market value, while undiversified managers at rapidly growing, entrepreneurially-based firms, such as Internet-based firms, value their option-based compensation at only 53% of its cost to the firm. These estimates prompt questions of whether compensation plans in such firms are weighted too heavily towards incentive-alignment to be cost effective.

Does Risk Matter? Corporate Insider Transactions in Internet-Based Firms

This paper investigates an unintended consequence of equity-based compensation plans: in highly volatile firms, managers appear to undermine the compensation system's intended effect of aligning managers' interests with those of shareholders. Specifically, many managers are selling at least a portion of their equity stakes, or exercising their stock options and selling the acquired shares. These sales may reduce the desired incentive-alignment; they also have the potential to directly decrease equity value if market participants interpret the sales as a signal that managers believe their firms to be overvalued. But overvaluation is not the only reason that these corporate insiders sell. Many managers in Internet-firms have undiversified portfolios, holding mainly the equity of their firms. This lack of diversification, combined with the high volatility of Internet-based firms, and the limited control managers have over that volatility, gives managers an incentive to diversify by selling their stock holdings, irrespective of their beliefs about the accuracy of the current stock price. Indeed, based upon the average Internet firm's volatility of 113% annually (relative to the 22% of the S&P 500 Index), a non-diversified insider would be better off selling shares to diversify even if he/she believed the firm to be undervalued by the market by almost 50%. This paper investigates whether the market response to insider selling in Internet-based companies reflects these multi-faceted incentives. I find that, in contrast to insider selling in the general population of firms, sales in Internet-based companies do not produce negative excess returns (the mean return on an insider selling day is +0.82%, net-of-market movements, for an Internet-based firm). This result suggests that market participants do not, on average, interpret managerial sales in Internet-based as a signal of overvaluation. The relatively high incidence of managerial sales in Internet-based firms may instead reflect the high value managers' place on holding a diversified portfolio, an observation that raises questions about the optimal compensation-mix in such firms.