The Online Economy: Strategy and Entrepreneurship
Course Number 1760
Associate Professor Benjamin G. Edelman
Fall; Q1Q2; 3 credits
Exam or Paper
Course Number 1765
Assistant Professor Michael Luca
Spring; Q3; 1.5 credits
Exam or Paper
This course equips students whose career paths will be closely connected to online businesses. In particular, the course is appropriate for:
- Students planning entrepreneurial ventures in online businesses, including founding or joining a startup.
- Students whose careers as managers, investors, or consultants will focus on online businesses.
- Students whose careers will develop online aspects of traditional businesses (e.g. online marketing, reputation).
Technical expertise and related experience are neither necessary nor expected.
Online businesses attract entrepreneurs with their low capital requirements, ease of experimentation, well-known successes, and possibility of quickly achieving scale. These opportunities are equally attractive to existing businesses seeking growth and efficiencies on the internet. Yet online ventures pose distinctive management challenges. For one, they are often grounded in network effects, requiring mobilizing many participants in order to deliver value. Second, while payoffs can be spectacular for winners, the market structure invites strategic blunders. When network effects are strong, industries have room for only a few platforms; often, a single platform prevails. Rivals sometimes persist in fighting too long, and firms can miss chances to profitably share their platforms with competitors. The Online Economy offers a perspective to capture these opportunities and avoid similar mistakes.
In many sectors, powerful firms already control key online platforms: Google, Facebook, Apple, Amazon, Microsoft, and others. We explore two opposing perspectives on market power: how dominant providers can expand their positions and respond to threats, and how upstarts can find opportunities in the face of seemingly-omnipotent incumbents.
Online businesses are also unusual in their revenue sources, as users often receive service for "free." We consider online advertising-supported services both from the perspective of platforms looking to generate revenue and from the perspective of companies seeking to run marketing campaigns. That said, free and subsidized strategies have their limits: Too many online businesses have failed due to business models grounded in unrealistic revenue plans. The Online Economy arms students with a framework to identify viable revenue sources.
The Internet's ever-growing content now impacts sectors that initially resisted change. From reading the news to calling a taxi to buying a home, consumers have swarmed to new platforms and services, pushing suppliers to adjust. The Online Economy explores some of these new markets, including regulatory barriers as well as the systems that identify trustworthy information and appropriate transaction counterparts. We examine both the perspective of new technology providers as well as traditional firms looking to expand online.
Course Content and Organization
We consider factors needed for success in online business:
- Launch strategy. How to reach critical mass? We develop strategies such as penetration pricing, permanently subsidizing one set of users, creating "stand-alone" value, and securing exclusive relationships with marquee users.
- Implementation. What if you have a great idea but no technical capability? We examine practical questions such as hiring a CTO to building in the cloud to accepting online payments. In the full course, two exercises build technical skills in data analytics and site design.
- Digital marketing. We explore strategies for expansion, including online advertising, using intermediaries to broaden distribution, and offering price promotions. We devise methods to assess the effectiveness of these campaigns and measure their benefits.
- Design. What structures, rules, and incentives create a well-functioning online ecosystem? We evaluate dynamic pricing to assure that markets clear, review and reputation systems to favor reliable information and trusted participants, and a variety of institutions to create a safe environment for users while protecting a site from liability. We consider reputation systems both from the perspective of a platform designer, and from the perspective of the users and companies whose activities, products, and services are presented and often rated.
Course Format and Grading
Prof. Edelman teaches a 28-session offering in Q1Q2, with a choice of final paper or exam, as well as two exercises to build technical skills. Students in this section receive 3.0 course credits.
Prof. Luca teaches a 14-session offering in Q3 with a choice of final paper or exam. Students in this section receive 1.5 course credits. Prof. Luca is available to supervise limited 1.5-credit IPs related to the course.