Marketing Science
Frictionless Commerce? A Comparison of Internet and Conventional Retailers
Management Science
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Internet referral services, hosted either by independent third-party infomediaries or by manufacturers serve as "lead-generators" in electronic marketplaces, directing consumer traffic to particular retailers. In a model of price dispersion, we investigate the competitive implications of these institutions on retailer prices and their impact on channel structures and distribution of profits. Offline, retailers face a higher customer acquisition cost. In return, they obtain full information about consumer valuations. Online, they save on the acquisition costs, but lose the ability to charge prices based on consumer valuation. This critical tradeoff drives equilibrium profits. The establishment of a referral service is a strategic decision by the manufacturer, in response to a third-party infomediary. It leads to an increase in channel profits and a reallocation of the increased surplus to the manufacturer, via the franchise fees. The impetus to increased profits comes from both retailers' ability to price discriminate between informed and uninformed consumers, and by the lowering of acquisition costs due to diversion of traffic from the offline to the online channel. Our model highlights that online prices are lower than offline prices for the retailer enrolled with the infomediary. We point out that in equilibrium, the retailer associated with the infomediary, has higher expected sales and gross profits. We also show that some of the online cost savings are transferred to the consumer, leading to an overall increase in consumer welfare.