Analysis On Network Effect And Behavior In Door To Door Distribution And Herbal Cosmetics Market In Korea

The purpose of this study is to reinterpret the strength of Korean Herb Cosmetics through door-to-door sale in connection to recent economic theories.In September2005, Chinese government announced that they would enact the new regulations on "multi-level marketing ban" and "direct sales ban" in November and December in2005. Unlike the multi-level marketing ban, they will allow the door-to-door sales by sales people. The rules regarding direct sale may have possibly relax, as a result a lot of multinational companies try to enter door-to-door distribution market in China. So if Korean big cosmetics companies go into Chinese market using distribution channel of door-to door distrinution channel which is the core competence of Korean cosmetics companies, it will be one of opportunities.But although there have been many studies done on fields of clothings, cosmetics and law, there are no economical studies has been done on the Korean Herb Cosmetics that are distributed through door-to-door sale. Therefore, this paper aims to analyze the strengths of door-to-door sale distribution channel that Korean Herb Cosmetics companies use, by adopting the network effect analysis and behavioral economics.Through the analysis in this paper, we can know that the strong points of door-to-door sale distribution channel and psychological strategy of companies that appeal to middle aged women. And the economic theory that is related to network, bandwagon effect and behavioral economics can explain the hypothesis. The market condition and strategies of companies that network effect theory hypothesizes match the current market conditions for Korean Herb Cosmetics distribution. The consumer behaviors that theories related to bandwagon effect and behavioral economics hypothesized match the consumer behaviors in buying the Korean Herb Cosmetics through door-to-door sale, according to the empirical studies. So the strength of door-to-door distribution channel and Korean Herb Cosmetics can be reinterpreted through using alternative economic theories.Among many social phenomena, many are unexplainable by traditional economic theories. In real life, humans do not always use rational reasoning. Humans are influenced by other people, and feel happy or unhappy when compared to others. Humans seek homogeneity, and put more value in loss than in gain. Such behaviors can be explained by economic theories related with network, bandwagon effect, or behavioral economics.Even the consumer behaviors in purchasing Korean Herb Cosmetics through door-to-door distribution channel display irrational human behaviors that traditional economics can not explain. The network externalities that is displayed in door-to-door sale distribution channel violates the general competitive equilibrium in economic hypothesize; the consumer behavior in door-to-door sale distribution channel violates the indifference curve hypothesis; and the psychology of a consumer who buys everything can’t be explained by traditional economic theories. Only behavioral economics, application of psychology and economy, can account for such consumer behaviors. It means that it can be more useful to analyze consumer behaviors based on alternative theories.However, this paper only could prove the network externalities and tendency of psychological purchase in door-to-door sale distribution market and Korean Herb Cosmetics market. In this study, person’s mind and the external effect from outside the market can’t be measured, which is the limitation with this study. Future studies should include ways of turning human behaviors into numerical values to overcome this limitation.