Price Competition between a Dual-Channel Retailer and a Pure Online Retailer

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1 Journl of Emerging Trends in Economics nd Mngement Sciences JETEMS 5:-7 Scholrlink Reserch Institute Journls, 4 ISSN: 4-74 jetems.scholrlinkreserch.org Journl of Emerging Trends Economics nd Mngement Sciences JETEMS 5:-7 ISSN: 4-76 Price Cometition between Dul-Chnnel Retiler nd Pure Online Retiler WU Chun-Xu, GUO Jun, nd XU Chun-Yong School of Mngement, University of Science nd Technology of Chin, Hefei 6, Chin. Corresonding Author: GUO Jun Abstrct Price cometition between dul-chnnel nd ure online retilers frequently occurs in relity, but the result is too comlex to foresee. Pricing strtegy nd mngement dvices re given in this er to hel enterrises solve roblems of rice cometition. Focused on the rice cometition between dul-chnnel retiler nd ure online retiler, nd the uniform ricing strtegy ws doted by the dul-chnnel retiler to void chnnel conflicts. A liner demnd model which contined the substitution effect ws doted to chrcterize the cometition between different chnnels nd non-cooertive gme model ws built to obtin the ricing equilibrium. Severl secific scenrios were set to comre the ricing strtegies of retilers. From the findings it cn be concluded tht whether the dul-chnnel retiler hs n dvntge over the ure online retiler in cometition deends on the reltive size of online mrket to the trditionl chnnel mrket nd the dul-chnnel retiler s min sles chnnel should be grdully shifted from the offline to online, nd the trditionl chnnel will be comlementry chnnel of online chnnel to imrove the user exerience. When the dul-chnnel retiler hs no obvious dvntge on mrket size, the ure online retiler will benefit more from rice cometition. Keywords: dul-chnnel retiler ure online retiler uniform ricing rice cometition. INTRODUCTION Online shoing hs become n imortnt wy for shoing. The trditionl retilers re fcing the loss of customers nd rofits. In order to coe with the imct of internet sles, some trditionl retilers try to oen online chnnels to exnd sle chnnels, nd we define this kind of retilers s dul-chnnel retiler. For the dul-chnnel retiler, the oening of online chnnel will bring ricing conflicts between different chnnels. But the ure online retiler hs no chnnel conflicts. Price wr between dul-chnnel nd ure online retilers frequently occurs in Chin. For instnce, the rice wr between Jingdong fmous e-tiler in Chi nd Suning fmous dul-chnnel retiler in Chi on August 4,. Uniform ricing strtegy ws doted by Suning to chieve dvntge in cometition. The rice wr hs ended, but the imct of uniform rice olicy on both sides is still uncler. While in rctice, ricing is one of the most imortnt decisions for retilers, therefore, reserch on rice cometition between the dul-chnnel nd ure online retilers hs rcticl significnce. Widesred ttention hs been id to rice cometition nd coordintion of online retil in recent yers. There were three tyes of reserch: Conflicts nd coordintion of online direct retil nd trditionl retil. For exmle Ching et l. studied the imct of consumer ccetnce on rice cometition. Yo nd iu5 studied the trditionl retiler dded vlue for the roduct. in et l. 5 studied the rice strtegy which bsed on the ssumtion tht consumers reservtion rice exonentilly declined with time. Yn et l. 7 studied the rice cometition nd coordintion of chnnels under the condition of rice-service sensitive demnds. Price Cometition of indeendent online nd trditionl retiler. Brynjolfsson et l. found tht the rices re 9 6% lower on the Internet thn in conventionl outlets. Ci et l. modeled the rice cometition of retilers with gme theory nd informtion economics. Chen et l. 6,8 studied the imct of e-commerce imlementtion level on retilers. Price cometition of dulchnnel nd ure online retilers. Friberg et l., did some emiricl studies using the dt of books nd music CDs which indicted the ure online retiler s rice is lower thn the dulchnnel retiler. Pn et l. built Hotelling model nd through simultion they ointed out the ure online retiler s rice generlly lower thn the dul-chnnel retiler. Although extensive nd in-deth reserch hs been done by revious studies, fully nswers re still not be given uon the rice cometition between the dul-chnnel nd ure online retilers. In the reserch, sme roducts were sold in two different

2 Journl of Emerging Trends in Economics nd Mngement Sciences JETEMS 5:-7 ISSN: 4-76 chnnels by mnufcturer, but the imct of other retilers on ricing ws not considered. In the reserch, the two retilers only sold roducts in certin chnnel, nd one rty might be dulchnnel retiler ws not considered. In the reserch, min conclusions were drwn by emiricl reserch lcking of theoreticl nlysis, nd the imct of uniform ricing strtegy on the ricing cometition ws not nlyzed deely. For this reson, this er studies the ricing cometition between the dul-chnnel nd online retilers under the uniform ricing strtegy. Considering the uniform ricing strtegy hs been tken by more nd more dul-chnnel retilers in rctice, nd this ssumtion ws mde in st reserche.g., Pn et l., so this ssumtion is lso followed in this er. MODE Price Sme merchndises re sold by dul-chnnel nd ure online retilers. nd o is the dul-chnnel retiler s trditionl nd online chnnel rice. is the ure online retiler s rice. To void chnnel conflicts nd reserve chnnel integrity, uniform ricing strtegy is doted by the dul-chnnel. This is suorted by retiler, i.e., o necdotl evidence of the retil mrkets tht shows lot of dul-chnnel retilers hve the sme rices t the two chnnels e.g., Estee uder, Best Buy, Circuit City, ComUSA, nd Suning etc.. Demnd The demnd of ech chnnel is ffected by its own rice nd rivl chnnels rice. d is the dul-chnnel retiler s demnd on trditionl chnnel, nd it is ffected by its own rice, s well s ffected by the rivl chnnels rice o nd : d b + n + n t o mens tht substitution effect exists between different chnnels, nd when the rice in chnnel increses, consumers will shift to other chnnels, leding to rice incresing of rivl chnnels. Greter n stronger substitution effect mens more intense cometition of different stores. d Anlogously, the online chnnel demnd of dulchnnel retiler o totl demnd of dul-chnnel retiler d nd demnd of ure online retiler d re given in the following equtions. d o t b o+ n+ n d + dt do t t b + no d + n 4 The menings of relted symbols re described s below: : Mximl otentil demnd size of trditionl chnnel : Mximl otentil demnd size of online chnnel t : Proortion of dul-chnnel retiler s online otentil demnd b : Price sensitivity coefficient of trditionl chnnel b : Price sensitivity coefficient of online chnnel n : Substitution effect coefficient of rivl stores In generl, rity is esier in online environment, so consumers re more sensitive to rice chnges in this condition. In ddition, chnnel demnds re ffected more gretly by its own chnnel thn rivl chnnels, so this er ssumes : > b n. b > Revenue According to both retilers rice nd demnds, the two retilers revenue re s follows: c d c 5 t+ o o c d d 6 re the dul chnnel retiler nd ure online retiler s totl revenue. c, c, c re the unit sle cost of trditionl chnnels online chnnel of dul-chnnel retiler nd online chnnel of ure online retiler. Model Solution nd Anlysis It is ssumed in this er tht ll the retilers cn erfectly foresee the finl outcome, in ccordnce with the literture where it is clled fulfilled execttion. Dul-chnnel nd ure online retilers simultneously mke decisions to mximize their own revenue resectively. The decision-mking rocess is non-cooertive sttic gme nd the equilibrium cn be chrcterized by the Nsh equilibrium. The result is given by roosition. Proosition:If o, dul-chnnel nd ure online retilers equilibrium rices re given s follows: { n+ bt nt + b b[ c+ c c n bc b c]} 7 { c+ c n + [ c c b + t bc] n+ 8 b+ b [ t bc]} Where, + b 4bn bb n

3 Journl of Emerging Trends in Economics nd Mngement Sciences JETEMS 5:-7 ISSN: 4-76 Proof: The best-resonse functions cn be obtined from the first order conditions:, : c c + t + bc + bc + n 9 b + b 4n c t + n + b Concvity of the revenue function is not difficult to be verified, so the first order conditions re necessry nd sufficient., cn be obtined from consisting of equtions9 nd. Corollry : >, > i, i i, b b Proof: > b b > > b n n b nb n > n + > > The effect of cost on ricing is showed in Corollry. It is esy to find the ricing of retiler is ffected by its own costs s well s the rivl costs: both retilers rices will be risen no mtter either retiler s costs increse. The high cost of trditionl chnnel is the dul-chnnel retiler s wekness in cometition, nd it is very esy to be ttcked in rice wr. For dul-chnnel retiler, the strength of trditionl chnnel should be fully used to reduce the overll cost.for instnce, logistics nd distribution strengths of trditionl chnnel re shred with online chnnel to coe with the rice wr. Pricing Strtegy Anlysis In order to nlyze nd comre the retiler's ricing strtegy, it is necessry to simlify the model. Assumes tht the two retilers hve the sme cost, secilly, c c. When the ricing c strtegies re comred, the effect of cost is excluded under this ssumtion. In other words, the imct of cost structure on the ricing strtegy is not considered in section 4. In order to void excessive border sitution discussion,, re lrge enough. Under the bove ssumtions, the rection functions 9 nd become: β + β t + n 4 b Where: + t n β, β b+ b 4n b+ b n The two retilers equilibrium rice equtions 7 nd 8 becomes: b n t+ n+ b n+ b + b n + n b b t The form of equilibrium is still comlicted in this sitution. The equilibrium is ffected by the rice sensitivity. Menwhile, the otentil size of the mrket is lso n imortnt fctor. Considering the strength of retiler's mrket osition is reflected by its otentil mrket size, two secil scenrios re set to nlyze the imct of mrket osition on the cometition. Sitution : the two retilers hve the sme otentil online mrket size. In this sitution, the ure online retiler lredy hs certin mrket osition, but the totl otentil mrket size is still too smll comred with the dul-chnnel retiler. Sitution : the two retilers hve the sme totl otentil mrket size. In this sitution, the ure online retiler hs strong enough osition in the online mrket, nd the dul-chnnel retiler is not in dominnt osition in either chnnel. Sitution my be more in line with current mrket conditions. For exmle, some e-tilers lredy hve certin mrket size, but their mrket sizes re fr from the trditionl retilers, e.g. comred with the retil gints Suning. Sitution : Sme Potentil Online Mrket Size Considering the two retilers hve the sme otentil online mrket size, then the min fctors ffecting ricing is the otentil trditionl mrket size. The min roblem we re concerned bout is how the mrket rice nd mrket structure re ffected by the trditionl mrket size. In the following, the suerscrit I is used to refer this cse. When t, the two retilers hve the sme otentil online mrket size. In this sitution, osition is obtined s follows:

4 Journl of Emerging Trends in Economics nd Mngement Sciences JETEMS 5:-7 ISSN: 4-76 Position : If t : when I I I I,k, <, < when I I I I k,, <, when [,, I I I I, > when [,, d I t >, d I o. Where, k b + b n 4b b n < k <,, b b+ b n, nd b k < < Proof: If t, from nd, we know: b + b n when < : d t >, b n d o > At this time, trditionl nd online chnnel will be oened by the dul-chnnel retiler. Relevnt decision vribles cn be obtined through I b + b +, n+ b + b b+ b b + b + 6 b b n+ b b n substituting t into ⒀ nd ⒁. I 7 [ ] I, [ n + b + b ] b b n+ b b n I b 8 6 I I b b I I 4b + 4b b + n 8 b n When, b n 9 When k,, Zero vlue theorem Esy to be roved <, thus: When,k, <, <, I I I I thus <, < When k,, <,,thus I I I I <, When [,,, >,thus I I I I, > When [,, it cn be roved tht d I t >, d I o from nd. From Theorem, with the increse of trditionl mrket size with resect to the online mrket size, four cometition stges er. In the first stge, the dul-chnnel retiler's ricing sce nd revenue re limited by the smll trditionl mrket size, nd the trditionl chnnel should be reserved crefully. In the second stge, the dul-chnnel retiler s revenue exceeds the ure online retiler, nd the trditionl chnnel should be remined. The trditionl mrket size of the dul-chnnel retiler should be further exnded through driving the trditionl chnnel by the online chnnel to increse revenue. In the third stge, the rice nd revenue of ure online retiler re exceeded by the dul-chnnel retiler. In this sitution, the strength of trditionl chnnel should be used fully through driving online chnnel by the trditionl chnnel to chieve the best rice nd income. With further increse of the trditionl mrket size, the fourth stge ers. At this oint, the online chnnel is given u by the dul-chnnel retiler, becuse its ricing sce is limited by the smll online mrket size nd the low rice ersecution from the ure online retiler. To mke it esier to intuitively understnd the osition, numericl exmle is given below. Under the ssumtions, t,, b.5, b. 6, n. re given. With the chnge of, the chnge of rice demnd nd revenue re showed in the Figure.

5 Journl of Emerging Trends in Economics nd Mngement Sciences JETEMS 5:-7 ISSN: 4-76 Price chnge of two retilers the sitution tht the online chnnel is given u by the dul-chnnel retiler. We cn see from Figure : Figure b shows tht the totl sles of dulchnnel retiler is lwys higher thn the ure online retiler. It lso suorts the dul-chnnel retiler s demnd is higher thn the ure online retiler in rel life. For instnce, the sle of Suning is higher thn Jingdong no mtter whether Suning oens the dul-chnnel. Figure b lso shows tht when < 5 the dul-chnnel retiler s online mrket size is 5, the online sle of dul-chnnel retiler hs been exceeded by its trditionl chnnel. It reflects tht the trditionl chnnel hs the nturl dvntge of driving sles with resect to the online chnnel. After the online chnnel is given u by the dul-chnnel retilerfigure on the right of, the ure online retiler benefits more: its rice demnd nd revenue ll imrove gretly thn before. This lso exlins why Jingdong hs no rest to force Sunng to exit the online chnnel through rice wr. b Demnd chnge of two retilers c Revenue chnge of two retilers Figure Price demnd nd revenue chnge with The chnges of rice demnd nd revenue with re described in Figure. The figure on the left of describes the sitution tht trditionl chnnel nd online chnnel re oened by the dul-chnnel retiler, nd the figure on the right of describes 4 Sitution : Sme Totl Potentil Mrket Size In sitution, the two retilers hve the sme otentil online mrket size, nd the totl otentil mrket size of the dul-chnnel retiler is lrger thn the ure online retiler. With the develoment nd exnsion of the ure online retilers, the two retilers my hve sme totl otentil mrket size. In the following, the suerscrit II is used to refer this cse. In this sitution, osition is obtined s follows: + t t, then Position : when II II II II <, <. Proof: When + t t, then t cn be obtined. Substitute t into 5 nd 6, thus: II + b + n, II + b + b + n. Other decision vribles cn be obtined II ccording to nd : II II + b+ b + b b + b + b n II II b n + <, II thus II < II

6 Journl of Emerging Trends in Economics nd Mngement Sciences JETEMS 5:-7 ISSN: 4-76 II II + b <, thus 8 II II <. Position shows tht when the two retilers hve the sme totl otentil mrket size, the ure online retiler is not in dominnt in the cometition: its rice nd revenue both re lower thn the dul-chnnel retiler. This exlins why Suning dres to clim its rice is lower 5% thn Jingdong in fce of the rice wr nd Suning did so in rctice. In fct, when the dul-chnnel retiler fces such sitution, something cn be done to del with it. From the exression of t nd, the online mrket size of the dul-chnnel retiler cn be incresed by reducing, s well s the g of rice nd revenue cn be nrrowed simultneously. cn see by the, reducing the size of the mrket cn increse the network's twochnnel retilers nd nrrow the income g between the rice nd ure online retilers. Therefore, in this sitution, should be reduced nd its online mrket size should be exnded. While reducing is not simly to reduce the trditionl mrket size, its min sles chnnel should be grdully shifted from the offline to online, nd the trditionl chnnel will be comlementry chnnel of online chnnel to meet ll kinds of demnds of online mrket. Next, wht cuses the dul-chnnel retiler is not in dominnt will be exlored. et,, denote the rice of the dul-chnnel retiler when oening the dul-chnnel simultneously, only oening the trditionl chnnel nd only oening the online chnnel, resectively. Position 4 is obtined s follow: t t Position 4: When <, < +, thus Proof: The two retilers totl otentil mrket size both re A. The dul-chnnel retiler s online nd trditionl mrket size re ϕ A ϕa, resectively. For given, the method of seeking rection function in osition is used here to solve the rection functions under different conditions. When the trditionl nd online chnnels re oened simultneously by the dul-chnnel retiler, the rection function of with resect to is: n. 4 b + b n When only the trditionl chnnel is oened by the dul-chnnel retiler, i.e. when, the rection ϕ function of with resect to is: ϕ n. 5 b n When only the online chnnel is oened by the dulchnnel retiler, i.e. when ϕ, the rection function of with resect to is: A + n ϕ. 6 b n lim t b tb n b b > b + b b ϕ Thus, < lim ϕ n b b b n A b n b n A b > > Thus, <. b + b n b n b + b n b n From osition 4, it cn be lerned tht the rice of oening two chnnels is higher thn only oening one chnnel for the dul-chnnel retiler. Thus, the rice will be reduced if single-chnnel retiler chnges into dul-chnnel retiler. More nd more trditionl retilers relize the rosect of the online mrket, nd begin to exnd the online chnnel. However, some trditionl retilers do not fully understnd the risks of oening the online chnnel, nd blindly oening the online chnnel leds to fll into the dilemm light. Here, the risk for the trditionl retilers who wnt to exnd the online chnnel is wrned: be redy to withstnd the imct of low-rice risk. From osition 4, the reliminry reson of the dulchnnel retiler s low rice is found. Further nlysis will be done to exlore the more in-deth reson. Next, wht cuses the dul-chnnel retiler is not in dominnt will be exlored. et ε, ε, ε denote the rice elsticity of the dul-chnnel retiler when oening the dul-chnnel simultneously, only oening the trditionl chnnel nd only oening the online chnnel, resectively. Position 5 is obtined s follow: t t Position 5: When ε >, ε > ε ε +, thus Proof: dd / d b + b ε. d / n b + b n Similrly, ε nd ε cn be obtined. b ε. 7 ϕ n b n 5

7 Journl of Emerging Trends in Economics nd Mngement Sciences JETEMS 5:-7 ISSN: 4-76 b n b ε. 8 ϕ b b ε ε> ϕ n b+ b n b b b > n b n b Thus, ε > ε b+ b b ε ε n b+ b n ϕ n b n > Thus, ε > ε. From osition 5, it cn be lerned tht the rice elsticity of oening two chnnels is higher thn only oening one chnnel for the dul-chnnel retiler. When only one chnnel is oened by the dulchnnel retiler, reducing one unit rice will led to only one chnnel sles increse. While for the dulchnnel retiler, reducing one unit rice will led to two chnnels sles increse. Therefore, the dulchnnel retiler hve higher rice elsticity when oening two chnnels simultneously which leds to lower rice thn only oening one chnnel. If the dul-chnnel retiler wnts the rice elsticity to be reduced, he must mke full use of his ltform dvntge. For exmle, more roduct differentition nd exclusive brnds sles cn be introduced, nd the scoe of customized roducts is exnded to meet the individul needs better. All of this will hel to reduce the rice elsticity. CONCUSIONS AND IMITATIONS Considering the dul-chnnel retiler in fce of ricing conflicts, the ricing cometitive between the dul-chnnel nd ure online retilers under the uniform ricing strtegy is studied in this er. The reserch finds: both retilers rices will be risen no mtter either retiler s costs increse. The strength of trditionl chnnel should be fully used by the dulchnnel retiler to reduce the overll cost. Severl secific scenrios were set to comre the rice strtegies of retilers. When the two retilers hve the sme otentil online mrket size, then the otentil trditionl mrket size is the min fctor ffecting ricing. When the otentil trditionl mrket size is much smller, the dul-chnnel retiler s ricing sce nd revenue is limited by it. With the incresing of the otentil trditionl mrket size, this restriction becomes smller. When the trditionl mrket size is roughly equl to the online mrket, the dvntges of dul-chnnel retiler grdully reflects, nd the ure online retiler s rice nd revenue re grdully exceeded by the dulchnnel retiler. However, when the trditionl mrket size is much lrger thn the online mrket, the dul-chnnel retiler s ricing sce is limited by the online mrket size. At this time, it s better for the dul-chnnel retiler to give u the online mrket. 6 With the develoment nd exnsion of the ure online retilers, the two retilers my hve sme totl otentil mrket size. In this sitution, the dulchnnel retiler s rice nd revenue re lower thn the ure online retiler. Further nlysis finds tht the dul-chnnel retiler s low rice is cused by its high rice elsticity. On the one hnd, this exlins why Suning dres to set its rice lower thn Jingdong On the other hnd, n ide is rovided for the dulchnnel retiler to chnge its retiling model, i.e. its min sles chnnel should be grdully shifted from the offline to online, nd the trditionl chnnel will be comlementry chnnel of online chnnel to meet ll kinds of demnds of online mrket. This er still hs some limittions. For exmle, to simlify the nlysis, sme costs of ll chnnels re ssumed. Different costs of different chnnels could be studied to mke the cometition reserch more in line with the relity. In ddition, the rndom demnd is not considered in this er, nd this could be extended in the future study, etc. ACKNOWEDGEMENTS This work ws suorted by the Ntionl Nturl Science Foundtion of Chin Grnt No. 778, Centrl University Bsic Reserch nd Oerting Exenses of Secil Funding Grnt No.WK45. REFERENCES Bkos J Y Reducing buyer serch costs: imlictions for electronic mrketlces [J]. Mngement science, 4: Brynjolfsson E, Smith M D.. Frictionless commerce? A comrison of Internet nd conventionl retilers [J]. Mngement Science, 464: Ci J, Zhng Z H.. The ricing cometition model between electronic retiler nd trditionl retiler[j]. Journl of University of Shnghi for Science nd Technology, : Chen P Y, Hitt M. 4. A model of rice disersion in Internet-enbled mrkets[j]. Grdute School of Industril Administrtion, Crnegie Mellon University. Chen Y, Wng H C, Shen H Z. 6. Study on the Price Cometition between E-commerce Retiler nd Conventionl Retiler[J]. Systems Engineering Theory nd Prctice, 6: 5-4. Chen Y, Wng H C, Shen H Z. 8. Study on the Pricing Strtegy of Multi-chnnel Retiler in Internet Environment[J]. Journl of Industril Engineering nd Engineering Mngement, : 4-9.

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