IDEAS home Printed from https://ideas.repec.org/a/eee/oprepe/v9y2022ics2214716022000094.html
   My bibliography  Save this article

Pricing decisions of online and offline retailers, each offering a competing benefit

Author

Listed:
  • Perlman, Yael

Abstract

This paper studies a duopolistic market consisting of a conventional offline retailer and an online retailer, each of whom offers a competing benefit (attribute): Specifically, the conventional retailer is superior in terms of social aspects of the shopping experience, such as helpfulness of salespeople, whereas the online retailer offers the possibility of rapid and convenient procurement. Importantly, customers are assumed to be heterogeneous in the extent to which they value each attribute. We first study a scenario of a fully-covered market, in which consumers’ valuations of the attributes are high enough that every consumer purchases a product from one of the channels. In this case, we derive closed-form expressions for the retailers’ pricing strategies, their expected profits, and their market shares. We find that, surprisingly, under some conditions, the online retailer's price is higher than the conventional retailer's, despite the lower costs incurred by the former. Next, we study the realistic scenario in which the market is not fully covered (i.e., consumers have the option to avoid purchasing altogether), and compare it with the fully-covered market scenario. Specifically, we identify conditions under which, at equilibrium, each consumer buys a product, regardless of consumers’ valuations of the attributes.

Suggested Citation

  • Perlman, Yael, 2022. "Pricing decisions of online and offline retailers, each offering a competing benefit," Operations Research Perspectives, Elsevier, vol. 9(C).
  • Handle: RePEc:eee:oprepe:v:9:y:2022:i:c:s2214716022000094
    DOI: 10.1016/j.orp.2022.100231
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S2214716022000094
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.orp.2022.100231?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hult, G. Tomas M. & Sharma, Pratyush Nidhi & Morgeson, Forrest V. & Zhang, Yufei, 2019. "Antecedents and Consequences of Customer Satisfaction: Do They Differ Across Online and Offline Purchases?," Journal of Retailing, Elsevier, vol. 95(1), pages 10-23.
    2. Yuelin Shen & Sean P. Willems & Yue Dai, 2019. "Channel Selection and Contracting in the Presence of a Retail Platform," Production and Operations Management, Production and Operations Management Society, vol. 28(5), pages 1173-1185, May.
    3. Weon Sang Yoo & Eunkyu Lee, 2011. "Internet Channel Entry: A Strategic Analysis of Mixed Channel Structures," Marketing Science, INFORMS, vol. 30(1), pages 29-41, 01-02.
    4. Dumrongsiri, Aussadavut & Fan, Ming & Jain, Apurva & Moinzadeh, Kamran, 2008. "A supply chain model with direct and retail channels," European Journal of Operational Research, Elsevier, vol. 187(3), pages 691-718, June.
    5. Lin Tian & Asoo J. Vakharia & Yinliang (Ricky) Tan & Yifan Xu, 2018. "Marketplace, Reseller, or Hybrid: Strategic Analysis of an Emerging E‐Commerce Model," Production and Operations Management, Production and Operations Management Society, vol. 27(8), pages 1595-1610, August.
    6. Stefano Colombo & Noriaki Matsushima, 2020. "Competition Between Offline and Online Retailers with Heterogeneous Customers," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 57(3), pages 647-664, November.
    7. Wei-yu Kevin Chiang & Dilip Chhajed & James D. Hess, 2003. "Direct Marketing, Indirect Profits: A Strategic Analysis of Dual-Channel Supply-Chain Design," Management Science, INFORMS, vol. 49(1), pages 1-20, January.
    8. Yenipazarli, A. & Vakharia, A., 2015. "Pricing, market coverage and capacity: Can green and brown products co-exist?," European Journal of Operational Research, Elsevier, vol. 242(1), pages 304-315.
    9. Ozinci, Yaacov & Perlman, Yael & Westrich, Sara, 2017. "Competition between organic and conventional products with different utilities and shelf lives," International Journal of Production Economics, Elsevier, vol. 191(C), pages 74-84.
    10. Dominique Olié Lauga & Elie Ofek, 2011. "Product Positioning in a Two-Dimensional Vertical Differentiation Model: The Role of Quality Costs," Marketing Science, INFORMS, vol. 30(5), pages 903-923, September.
    11. Cai, Ya-Jun & Lo, Chris K.Y., 2020. "Omni-channel management in the new retailing era: A systematic review and future research agenda," International Journal of Production Economics, Elsevier, vol. 229(C).
    12. Kyle Cattani & Wendell Gilland & Hans Sebastian Heese & Jayashankar Swaminathan, 2006. "Boiling Frogs: Pricing Strategies for a Manufacturer Adding a Direct Channel that Competes with the Traditional Channel," Production and Operations Management, Production and Operations Management Society, vol. 15(1), pages 40-56, March.
    13. Jayashankar M. Swaminathan & Sridhar R. Tayur, 2003. "Models for Supply Chains in E-Business," Management Science, INFORMS, vol. 49(10), pages 1387-1406, October.
    14. Heller, Jonas & Chylinski, Mathew & de Ruyter, Ko & Mahr, Dominik & Keeling, Debbie I., 2019. "Touching the Untouchable: Exploring Multi-Sensory Augmented Reality in the Context of Online Retailing," Journal of Retailing, Elsevier, vol. 95(4), pages 219-234.
    15. Erik Brynjolfsson & Yu (Jeffrey) Hu & Mohammad S. Rahman, 2009. "Battle of the Retail Channels: How Product Selection and Geography Drive Cross-Channel Competition," Management Science, INFORMS, vol. 55(11), pages 1755-1765, November.
    16. Yan, Ruiliang & Pei, Zhi, 2009. "Retail services and firm profit in a dual-channel market," Journal of Retailing and Consumer Services, Elsevier, vol. 16(4), pages 306-314.
    17. Xu, Xun & Jackson, Jonathan E., 2019. "Examining customer channel selection intention in the omni-channel retail environment," International Journal of Production Economics, Elsevier, vol. 208(C), pages 434-445.
    18. Grewal, Dhruv & Janakiraman, Ramkumar & Kalyanam, Kirthi & Kannan, P.K. & Ratchford, Brian & Song, Reo & Tolerico, Stephen, 2010. "Strategic Online and Offline Retail Pricing: A Review and Research Agenda," Journal of Interactive Marketing, Elsevier, vol. 24(2), pages 138-154.
    19. Chris Forman & Anindya Ghose & Avi Goldfarb, 2009. "Competition Between Local and Electronic Markets: How the Benefit of Buying Online Depends on Where You Live," Management Science, INFORMS, vol. 55(1), pages 47-57, January.
    20. Schmid, Basil & Axhausen, Kay W., 2019. "In-store or online shopping of search and experience goods: A hybrid choice approach," Journal of choice modelling, Elsevier, vol. 31(C), pages 156-180.
    21. Nawel Amrouche & Ruiliang Yan, 2016. "A manufacturer distribution issue: how to manage an online and a traditional retailer," Annals of Operations Research, Springer, vol. 244(2), pages 257-294, September.
    22. Wei Hu & Yongjian Li, 2012. "Retail service for mixed retail and E-tail channels," Annals of Operations Research, Springer, vol. 192(1), pages 151-171, January.
    23. Kogan, Konstantin & Ozinci, Yaacov & Perlman, Yael, 2013. "Containing piracy with product pricing, updating and protection investments," International Journal of Production Economics, Elsevier, vol. 144(2), pages 468-478.
    24. Cao, James & So, Kut C. & Yin, Shuya, 2016. "Impact of an “online-to-store” channel on demand allocation, pricing and profitability," European Journal of Operational Research, Elsevier, vol. 248(1), pages 234-245.
    25. Mark B. Vandenbosch & Charles B. Weinberg, 1995. "Product and Price Competition in a Two-Dimensional Vertical Differentiation Model," Marketing Science, INFORMS, vol. 14(2), pages 224-249.
    26. Duarte, Paulo & Costa e Silva, Susana & Ferreira, Margarida Bernardo, 2018. "How convenient is it? Delivering online shopping convenience to enhance customer satisfaction and encourage e-WOM," Journal of Retailing and Consumer Services, Elsevier, vol. 44(C), pages 161-169.
    27. Benny Mantin & Harish Krishnan & Tirtha Dhar, 2014. "The Strategic Role of Third-Party Marketplaces in Retailing," Production and Operations Management, Production and Operations Management Society, vol. 23(11), pages 1937-1949, November.
    28. Zhang, Jianqiang & Cao, Qingning & He, Xiuli, 2019. "Contract and product quality in platform selling," European Journal of Operational Research, Elsevier, vol. 272(3), pages 928-944.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yael Perlman, 2023. "What type of contract should e-tailers offer sellers when facing internal competition," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 31(4), pages 1009-1027, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zhang, Xuefeng & Li, Guo & Liu, Mengqi & Sethi, Suresh P., 2021. "Online platform service investment: A bane or a boon for supplier encroachment," International Journal of Production Economics, Elsevier, vol. 235(C).
    2. Feng Fu & Shuangying Chen & Wei Yan, 2023. "Implications of e-tailers’ transition from reselling to the combined reselling and agency selling," Electronic Commerce Research, Springer, vol. 23(3), pages 1885-1920, September.
    3. Yael Perlman & Yaacov Ozinci & Sara Westrich, 2022. "Pricing decisions in a dual supply chain of organic and conventional agricultural products," Annals of Operations Research, Springer, vol. 314(2), pages 601-616, July.
    4. Yan, Yingchen & Zhao, Ruiqing & Liu, Zhibing, 2018. "Strategic introduction of the marketplace channel under spillovers from online to offline sales," European Journal of Operational Research, Elsevier, vol. 267(1), pages 65-77.
    5. Shangyu Pi & Yang Wang, 2020. "An E-Tailer’s Operational Strategy under Different Supply Chain Structures," Sustainability, MDPI, vol. 12(5), pages 1-20, March.
    6. Zhen, Xueping & Xu, Shuangshuang & Li, Yongjian & Shi, Dan, 2022. "When and how should a retailer use third-party platform channels? The Impact of spillover effects," European Journal of Operational Research, Elsevier, vol. 301(2), pages 624-637.
    7. Chen, Pingping & Zhao, Ruiqing & Yan, Yingchen & Li, Xiang, 2020. "Promotional pricing and online business model choice in the presence of retail competition," Omega, Elsevier, vol. 94(C).
    8. Matsui, Kenji, 2017. "When should a manufacturer set its direct price and wholesale price in dual-channel supply chains?," European Journal of Operational Research, Elsevier, vol. 258(2), pages 501-511.
    9. Matsui, Kenji, 2024. "Should competing suppliers with dual-channel supply chains adopt agency selling in an e-commerce platform?," European Journal of Operational Research, Elsevier, vol. 312(2), pages 587-604.
    10. Dong, Shuang & Qin, Zhongfeng & Yan, Yingchen, 2022. "Effects of online-to-offline spillovers on pricing and quality strategies of competing firms," International Journal of Production Economics, Elsevier, vol. 244(C).
    11. Li, Guo & Zhang, Xuefeng & Chiu, Su-Mei & Liu, Mengqi & Sethi, Suresh P., 2019. "Online market entry and channel sharing strategy with direct selling diseconomies in the sharing economy era," International Journal of Production Economics, Elsevier, vol. 218(C), pages 135-147.
    12. He, Bo & Gupta, Varun & Mirchandani, Prakash, 2021. "Online selling through O2O platform or on your own? Strategic implications for local Brick-and-Mortar stores," Omega, Elsevier, vol. 103(C).
    13. Shao, Xiaofeng, 2021. "Omnichannel retail move in a dual-channel supply chain," European Journal of Operational Research, Elsevier, vol. 294(3), pages 936-950.
    14. Huang, Lingchen & Huang, Zongsheng & Liu, Bin, 2022. "Interacting with strategic waiting for store brand: Online selling format selection," Journal of Retailing and Consumer Services, Elsevier, vol. 67(C).
    15. Li, Guo & Li, Lin & Sun, Jiasen, 2019. "Pricing and service effort strategy in a dual-channel supply chain with showrooming effect," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 126(C), pages 32-48.
    16. Jiang, Yuqing & Liu, Fan & Lim, Andrew, 2021. "Digital coupon promotion and platform selection in the presence of delivery effort," Journal of Retailing and Consumer Services, Elsevier, vol. 62(C).
    17. Zhang Guoxing & Fang Shuai & Lai Kin Keung, 2015. "Game Analysis in a Dual Channels System with Different Power Structures and Service Provision," Journal of Systems Science and Information, De Gruyter, vol. 3(6), pages 513-524, December.
    18. Yael Perlman, 2023. "What type of contract should e-tailers offer sellers when facing internal competition," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 31(4), pages 1009-1027, December.
    19. Zhen, Xueping & Xu, Shuangshuang, 2022. "Who should introduce the third-party platform channel under different pricing strategies?," European Journal of Operational Research, Elsevier, vol. 299(1), pages 168-182.
    20. Wang, Lisha & Chen, Jing & Lu, Yali, 2022. "Manufacturer's channel and logistics strategy in a supply chain," International Journal of Production Economics, Elsevier, vol. 246(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:oprepe:v:9:y:2022:i:c:s2214716022000094. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.journals.elsevier.com/operations-research-perspectives .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.