Note on Self-Restraint as an Online Entry-Deterrence Strategy

Authors:
Yunchuan Liu;Sunil Gupta;Z. John Zhang
Affiliations:
College of Business, University of Illinois at Urbana-Champaign, 1206 South Sixth Street, Champaign, Illinois 61820;Harvard Business School, 179 Morgan Hall, Soldiers Field, Boston, Massachusetts 02163;The Wharton School, University of Pennsylvania, 700 Jon M. Huntsman Hall, 3730 Walnut Street, Philadelphia, Pennsylvania 19104-6340
Venue:
Management Science
Year:
2006

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Abstract

We develop a game-theoretical model to show that in the markets where price consistency across channels is critical, an incumbent brick-and-mortar retailer can deter the online entry of a pure-play e-tailer by strategically refraining from entering online. In the markets where price consistency is not a constraint, we find that the incumbent can deter the e-tailer's entry only if it enters online and credibly operates the online channel as an independent profit center. In other words, the incumbent must be willing to cannibalize its own brick-and-mortar business by charging a low online price. We also discuss some social welfare implications of retail online entry and the managerial insights of our analysis.