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A major concern, however, when developing a new product is the necessity of simultaneously developing a new market. The balance between sufficient production to supply the market - but not so much as to ruin its profitability - is a delicate one. Information technology will be used increasingly to coordinate these activities among the marketing firms and their represented plants.

The Impact of E-Commerce on Competition in the Retail Brokerage Industry

Despite the growing market share of online brokerages and the concerns regarding their quality of trade execution, there has been little systematic research examining the execution quality of the different types of retail brokerage firms. Our paper fills this void by studying the quality of trade execution in full-service and online brokers. We first develop a stylized game theoretic model of competition between an incumbent full-service broker offering research and other services bundled with trade execution, and an online entrant offering just trade execution.

The results of our analytical model show that under certain conditions, an incumbent full-service broker would find it optimal to un-bundle its previously bundled offerings when competing with an online entrant offering just trade execution. We also find that the online entrant's quality choice depends on whether the incumbent retains a bundling strategy or changes to a component-pricing strategy. In particular, the online entrant chooses a lower quality when the incumbent pursues component pricing. While all consumers benefit from lower prices resulting from greater competition, online consumers may be faced with a lower quality offering compared to their counterparts.

Information technology (IT) and the growth of e-commerce in the 1990s have brought about significant changes in the retail brokerage industry (Konana et al. 2000). The Internet, in particular, led to the rapid growth of online brokerages that offered just trade execution to retail investors, resulting in an explosion of online trading by "self-directed investors" who primarily valued trade execution. Unlike traditional brokerages, online brokerage firms typically have no stock brokers or branch offices, and the entire process is automated.

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* Contributed by: -
Pankaj Kumar,
Batch of 2006-2008,
National Institute of Industrial Engineering, Mumbai.