BOOKS-A-MILLION

Books-a-million Firm Analysis

Books-a-million Firm Analysis

Introduction

Firms retail an increasing proportion of their products on-line. How much to sell through the Internet is a decision driven by market consideration and supply chain efficiency. In this paper, we use micro-economics to derive a firm's on-line and off-line quantity that best trade-offs costs, revenue, and competitive behavior. We study the case of a new firm which is a monopolist. We show that it may not be optimal for the firm to retail on both channels.

Indeed, the firm must consider all costs in retailing its products. The model is then refined to study the case of a new entrant facing an already populated market that operates on one or both channels.

Mission

To maximize profits it may be tempting for the new entrant to retail on-line if the incumbents are retailing on a bricks-and-mortar network, or vice-versa.

We show that this decision depends almost solely on a product's typology and the firm's supply chain efficiency. We also observe a new competitive strategy in the proportion of output one firm sells online: as that proportion increases for the existing firms, it will decrease for the new entrant, and vice versa.

Revenues

Motivated by the potential of the Internet, firms retail an increasing proportion of their products on-line. The decision of how much (if any) to sell through the Internet is essentially driven by market consideration and supply chain efficiency. In this paper, we use a simple micro-economic model to derive, under a set of regularity assumptions, the firm's on-line and off-line quantity that best trade-offs costs, revenue, and competitive behavior. We begin by studying the case of a new firm (“entrant”) which enters a market as a monopolist (with a radical innovation; e.g. a value proposition not yet available on the market).

The firm sees potential revenues from a pricesensitive market demand on both a bricks-and-mortar and an on-line channel. We show that this in itself is insufficient to induce a firm to retail on both channels. Indeed, the firm must consider supply chain costs in retailing its products, namely manufacturing, production, inventory, and shipping. Many entrants on the market have had serious difficulty turning a profit, mostly due to the induced complexity of managing production, inventory, and distribution when operating on both channels (Chopra and Van Mieghem, 2000).

Failing to distinguish and properly manage its costs on each channel has proved at least challenging, if not fatal to many firms. The model is then refined to study the case of an entrant (with an incremental innovation) facing an already populated market that operates on one or both channels.

Putting aside competition amongst the existing firms in the market, we model the entrant as a new firm competing against a group of existing firms, which we collapse into a single monopoly. Doing so permits the derivation of useful and sometimes counter-intuitive results(Thomson, 2006). For example, to maximize profits it may be tempting for the entrant to retail on-line if the incumbents are retailing on a bricksand- mortar ...