Versioning, Brand-stretching, and the Evolution of E-commerce Markets §

This paper offers an analysis of the evolution of e-commerce markets. We develop a model in which an initial group of small, no-name “click” firms create such markets by offering horizontally differentiated customized or “versioned” products and competing in prices. Subsequently, a traditional “brick” firm enters by stretching its brand name into the digital marketplace. Such entry causes many initial entrants to exit. Contrary to much popular and formal literature, we show that the volume of initial entry may well be inefficiently low despite the anticipated later exit. In addition, the conventional relationship between sunk cost and market structure is substantially weakened. JEL Classification Codes: L11, L86