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Understanding Network Effects: eBay Case Study and IPO Insights

This article explores the critical concept of network effects, defined as the increasing value of a product or service as its user base grows. The paper delves into market characteristics, competition dynamics, auction models, and their implications for companies like eBay and Priceline. It discusses WR Hambrecht’s OpenIPO and the challenges faced in the IPO market, highlighting the roles of buyers, sellers, and unique auction formats. Key takeaways include the impact of network externalities on innovation and competition, stressing how established standards affect market dynamics.

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Understanding Network Effects: eBay Case Study and IPO Insights

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  1. MI021 / CS021Computers in Management Oct. 3, 2006 Network Effects, eBay case, W.R. Hambrecht’s OpenIPO www.gallaugher.com

  2. 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

  3. Understanding Network Effects (a.k.a. Network Externalities, Metcalfe’s 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 don’t always win. Effect on innovation • Lowers competition with established standard • Increases innovation within standard sellers Users (Windows, PS2) Developers (programs, game titles) members

  4. auction auction 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

  5. Leading Global Retailers

  6. Shop, Buy/Transact, Communicate Search, Be Entertained

  7. Dependent on paid & natural search

  8. IPO Inefficiencies pays a 7% fee $27/share $45/share small Investors Institutions & large investors Underwriting syndicate small Investors The Firm small Investors

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