Promotional pricing and online business model choice in the presence of

retail competition

This article is about promotional pricing and online business model choice in the presence of
retail competition. In this article, a game theoretic model is developed for two periods that the
firms can sell the product. These two periods are the brick-and-mortar period during the peak
season through self-operated store and the online selling period during the off-season. In the
brick-and-mortar period, the firm have fully control with pricing power and the sole
ownership of the profits. In online selling period, firm has the choice to choose 2 online
business model which are reselling model and agency selling model, offered by e-tailer.
In this article, these models are used for comparison of firm’s and e-tailor’s choice for
promotional pricing during online period. In reselling model, the firm have the advantage to
set the wholesale price first and sell it to the e-tailer. E-tailer have the advantages to set the
selling price. In agency selling model, e-tailer provide the firm with a platform (online
market) where the firm can sell its promotional product to the customer directly. Thus, the
firm must pay the platform fee to the e-tailer. Moreover, in online period, the firm can choose
either monopoly e-tailer or duopoly e-tailers. In monopoly e-tailer, the firm chooses only one
business model. However, in duopoly e-tailers, the firm can choose to work with multiple e-
tailers for either sole model or both models.
According to the result of the article, without the retail competition, “win-win promotional
strategy”, also called Pareto-optimal situation, exits for both the firm and e-tailer in both
reselling model under a moderate inventory level and agency model under a high inventory
level with a moderate platform fee. However, with the retail competition, the e-tailers will not
have a “win-win sales strategy” in reselling model. In this case, hybrid selling model
becomes a choice to achieve a Pareto-optimal situation.
Besides, the supply chain participants are possible to seek direct pricing power in agency
selling model considering some factors such as low platform fees, high price sensitivities of
customers, an increase in the direct channel’s selling costs and a decrease in competitive
intensities.
In conclusion, to choose the right business model, the firm need to decide how to maximize
their profit regarding on the several factors such as inventory, revenue-sharing rate to the e-
tailer, marginal demand per price of online selling, degree of cross-price sensitivity and
selling cost.