Brands as Hierarchies


The frictionless vision of the digital economy tends to focus on the elimination of the information frictions, and predicts a cooperative, dynamic, network-based coordination, without studying in more depth the real role of trust. In this vision, trust is seen as automatically linked to cooperation and symmetry in relationships. However, we propose to consider the role of trust also in building relational hierarchies, when power in the relationship is asymmetric, as it happens in brand relationships.

Shapiro and Varian (1998) argue against the idea that brands will be replaced by perfect competition. "Visionaries tell us that the Internet will soon deliver us into that most glorious form of capitalism, the friction-free economy ... we agree that the Internet will make shopping easier than ever, but much of the talk about friction is fiction" (p. 142). Frictions are embedded in buying history and switching costs. They write: "You don' t have to drive to the store to order a new computer, but your choices for the future will still be hemmed in by the selections you made in the past. Like it or not, in the information age, buyers typically must bear costs when they switch from one information system to another. ... When the costs of switching from one brand of technology to another are substantial, users face lock-in. ... Lock-in can be a source of enormous headaches, or substantial profits, depending on whether you are the one stuck in the locked room or the one in possession of the key to the door" (Shapiro & Varian, 1998, p. 143).

Porter (2001) starts from another perspective. He does not study the specific rules of the information economy, even though he ends up admitting that the Internet can increase competition and challenge competitive advantages based on traditional sources of market differentiation. But what he does not accept is the idea that in this new turbulent economic environment firms do not have opportunities for differentiation. Unique products and unique brands will have the same power (if not more) as they had in the past.

Research efforts have found support for the idea that there are lock-ins and information hierarchies at the brand-consumer relationship level in the digital economy. According to Reicheld and Schefter (2000), who studied consumer behavior in this new marketspace, "price does not rule the web, loyalty does" (p. 106). Several studies have tested the hypothesis of perfect price competition on the Internet (Smith, Bailey & Brynjolfsson, 1999; Brynjolfsson & Smith, 2000; Pan, Ratchford & Shankar, 2001; Chen & Hitt, 2001; Johnson, Moe, Fader, Bellman & Lohse, 2000; Latzer & Schmitz, 2001; Ancarani & Shankar, 2002). These found that price discrimination and the role of brands in market relationships were very similar on the Internet as in the traditional markets: "... several studies find significant price dispersion in Internet markets. This price dispersion may be explained by heterogeneity in retailer-specific factors, such as branding and trust, retailer efforts to build consumer lock-in, and various retailer price discrimination strategies" (Smith et al., 1999, p. 26). Lack of transparency might be not the only source of price dispersion; people might be easily willing to spend more money for the same product, even though perfectly informed about the alternatives, if they invest in a branded relationship, trusting the company about future differences. Brynjolfsson and Smith (2000) state that: "In light of both existing theory and the earlier results on price levels and price changes, the dispersion in posted prices is surprisingly high. ... At the same time dispersion in weighted prices is lower on the Internet than in conventional outlets — reflecting a dominance among certain heavily branded retailers. Given these findings, we analyse potential sources for the high degree of price dispersion on the Internet. We conclude the Internet price dispersion may arise from two different sources of retailer heterogeneity: heterogeneity in customer awareness, and heterogeneity in retailer branding and trust. We also note that, far from being equalized, these differences among sellers may be amplified on the Internet as compared to conventional channels."

These results are particularly important because they come from studies of products considered homogeneous, like books and CDs, and we believe that the same study applied to more complex products would have found even higher price dispersion. But this also may support the idea that in a relationship economy the source for differentiation does not come necessarily from the core product, but rather from the service that surrounds it (Mandelli, 1998). Research results by Lynch and Ariely (2000) and by Shankar, Rangaswamy, and Pusateri (2001) support this hypothesis. They found lower price sensitivity on the Internet when more information is offered. Rajgopal, Venkatachalam and Kotha (2000) found that the quality of user experience can build a relationship competitive advantage. In an experience economy (Pine, Gillmore & Pine, 1999), what we buy is not the product but the complex experience associated to this buying behavior. If so, it is even more difficult to predict perfect competition in the Internet markets, since an interactive environment makes the task of building complex services and experiences around simple products easier than before (Mandelli, 1998). Amazon does not compete on books. It competes on the quality of their services, and on the sophistication of the user experience on their website, such as ease of navigation, personalization of services, feedback from the readers, etc.

Latzer and Schmitz (2001) give the following examples for providing evidence for lower than expected market transparency:

  1. Search engines cover only a small fraction of websites (0.03% according to Bergman, 2001) and e-commerce companies have the means to manipulate the perception of the search results (Sullivan, 2001);

  2. This is the reason why the traffic is very concentrated (they provide data for the Austrian market similar to those provided in the previous paragraph of this chapter);

  3. Consumers tend to search very few shopping-sites and the fraction of shoppers that stop their search after the first site visited is high (Johnson et al., 2000);

  4. The most important criterion for consumer choice in BtoC e-commerce is brand name, not prices (they provide primary evidence from a survey conducted on a national sample of Austrian users and meta-analytical research data supporting this hypothesis).

Brynjolfsson and Smith (2000) warn that unexpected (and contrary to frictionless hypothesis) results could be due to the immaturity of the Internet markets and easily change in the future. We tend to not agree. Even though it could happen that shopping sites and distributed intelligence in the market will diffuse and make prices more transparent [5], it is not likely that brands will become less important. The reason for this is that the source for differentiation and cognitive hierarchy, that is, the need to shortcut in complexity and the need to trust somebody in the light of an uncertain future, will not.

Trust in brands is the major driver of infomediation selection on the web, along with trust in social ties. Using data from the World Internet Project survey [6] on a sample of Italian users, we found that — when asked what influences their choice of information sources on the Internet — 36% of them answered that they choose information sources based on their reputation; 34% use the same source they use offline; 31% is influenced by word-of-mouth. These data confirm the importance of both cognitive and social hierarchies (delegations) in managing complexity on information-overloaded digital networks.

[5]Though this trend would be contrasted by the advertising-based business models of the infomediaries (Mandelli, 1999).

[6]The World Internet Project is an international research project, promoted by 25 research institutions in the world, which studies the impact of the Internet on society. See www.worldinternetproject.net for details. The Italian section of the project is based at SDA Bocconi, the business school of Bocconi university in Milan, Italy.

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L., Iivonen M. Trust in Knowledge Management Systems in Organizations2004
WarDriving: Drive, Detect, Defend, A Guide to Wireless Security
ISBN: N/A
EAN: 2147483647
Year: 2004
Pages: 143

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