Kathleen Kelly (Meg Ryan) owns a successful small bookstore in New York City. When Joe Fox (Tom Hanks) decides to open a new book superstore around the block, the two become adversaries. At the same time, Kelly and Joe also meet anonymously online and quickly become friends. The movie moves back and forth between their adversarial business relationship and their growing virtual fondness.
Bookselling is an industry where product differentiation matters. Since books themselves are identical, retailers must concentrate on other things to attract and retain customers. In You’ve Got Mail differentiation factors include location, selection, service, and price. In theory, there should be room for both book stores, but Fox Books wants to drive the smaller rival out of business. So Joe Fox focuses on those aspects of product differentiation that he can use to his advantage. Fox Books—playing the role of a retail giant like Barnes & Noble—relies on selling a large volume in order to achieve economies of scale. Large volume sales in bookstores occur because they have a bigger selection, discounted prices, and complementary goods like coffee, pastries, and music. Fox Books, like Barnes & Noble, is able to offer larger discounts than small stores because publishers offer better prices to bookstores that purchase in large quantity. That is, they have monopsonistic strength. Whereas, the small, independent bookstore has better service, and a friendly and more knowledgeable staff, Joe Fox launches a campaign to lure customers away with discount prices, cappuccino, and an atmosphere that encourages leisurely browsing.
In reality, this is the situation that many small booksellers face. Since they cannot effectively compete on price, smaller bookstores have to carve out market niches and provide more knowledgeable service in order to maintain their customers.
*Professors* Showing this clip is a great way to introduce competitive markets, discuss barriers to entry, promotions, and sales volume.
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