This dissertation consists of two essays, each of which provides preliminary answers to different problems faced by firms. The first essay (Chapter 2) considers whether it is necessary for a firm to be first to enter a new market to attain market leadership and under what conditions it can attain market leadership if it fails to be the first mover. The second essay (Chapter 3) considers how buyers should structure their compensation schemes for reverse auction market makers, such that the buyer lowers its overall cost of procurement. The following abstracts provide additional detail about the two essays.Abstract of Essay I: Determinants of Market Leadership in Competition Between Standards: The Roles of Network Externalities, Switching Costs, and Customer PreferencesCasual observation of the market outcomes of competition between standards in high-technology markets suggests that the first standard to enter the marketplace does not always win. Sometimes it loses and exits the marketplace; sometimes it survives as a follower in the marketplace. A natural question to ask therefore is: What factors determine which standard wins in the marketplace? How do these factors interact with one another? The present research answers these questions by modeling the competition between two standards, one of which enters the marketplace first. We model what we believe to be the key drivers of high-technology markets, namely, network externalities, customers preferences for competing standards, and the level of switching costs that customers face.We model customer behavior as a stochastic process in a market with two competing standards. The pioneering standard, standard 1, enters the market at a certain point in time, and the second standard, standard 2, enters later. Customers arrive continuously into the market and choose a product made with either standard 1 or standard 2. The market shares of the two standards evolve stochastically as customers arrive and as they switch between the two standards. We construct the market share stochastic process by aggregating the customer-level stochastic process and then characterize the long-run behavior of the market share process.Our analytical results suggest that the pioneering standard does not always win in high-technology markets. Instead, we find that a range of possible market outcomes arises, depending on the level of switching costs, degree of network externalities, and customer preferences. Our findings suggest that empirical studies that examine the outcome of competition between standards must account for the nature of the market structure.Counter-intuitively, we find that standard 2 can sometimes overtake the pioneering standard, even if it is inferior. A customers purchase decision is dependent on not only the benefits the standard offers but also the situational factors that surround the purchase decision. Therefore, a customer may purchase an inferior standard that offers lower utility because of situational constraints. Consequently, the inferior standard may become the market leader if enough customers encounter situational factors that make them purchase the inferior standard. Our findings suggest that some typical marketing strategy prescriptions for firms operating in high-technology markets, such as building an early lead and exploiting positive feedback, must be contingent on the extent of the switching costs, the strength of the network effects in the market, and customer preferences.Abstract of Essay II: Incentive-Compatible Compensation Schemes for Reverse Auction Market MakersWe investigate the nature of the incentive-compatible compensation scheme that a buyer must offer to a market maker when the buyer plans to hold an online reverse auction. When the buyer requires that the market maker qualify suppliers on its behalf and when the market makers effort is unobservable, the buyer faces a moral hazard problem. This problem arises because the market maker may shirk its responsibility by failing to exert any effort to qualify suppliers rigorously. Structuring appropriate compensation schemes represents one way to solve the moral hazard problem. We therefore use principalagent and auction theory to build a model to investigate how to structure compensation schemes to solve the moral hazard problem.Counter-intuitively, our findings suggest that, in some procurement situations, the buyer should structure the market makers compensation as a percentage of the contract value. Such compensation schemes offer an incentive to the market maker to increase the winning bid, which seems, at first glance, undesirable for the buyer. However, such a counter-intuitive compensation scheme is necessary when quality costs rise very quickly with poor quality and when there is significant variation in quality among suppliers. In this procurement situation, the buyer faces a high risk of incurring substantial costs associated with awarding business to a poor quality supplier. Therefore, the buyer wants to identify and screen out low quality suppliers so they do not bid in the auction. Proper supplier qualification is consequently necessary so that the buyer identifies low quality suppliers correctly. But, the market maker will not qualify suppliers rigorously if it receives compensation based on the amount of savings the buyer obtains. The resulting lack of rigor in supplier qualification can lead to a low quality supplier being invited to participate in the auction, in which case the winning bid is likely to be low, which increases the market makers compensation.In contrast, offering the market maker compensation that is based on a percentage of the contract value encourages the market maker to qualify suppliers rigorously. Rigorous qualification ensures that the buyer eliminates the low quality suppliers from the auction, and hence, the winning bid is likely to be high, which will increase the market makers compensation. More generally, our analysis suggests that the nature of an incentive-compatible compensation scheme depends on the extent of quality variation among suppliers and how fast quality costs increase with poor quality.
