Abstract

The Internet has significantly increased the bargaining power of consumers. Many online shopping search engines allow consumers to find most retailers that sell a specific product, compare product prices, and review detailed store ratings. With competition just a click away, online retailers have little control over where consumers would shop. Offering the lowest price alone does not always guarantee that consumers will come and buy at your site. Other non-price attributes, such as service quality and a merchant’s brand recognition, also play important roles in helping online retailers to build competitive advantages. In this paper, we present a model of price competition that assumes e-tailers can mainly differentiate themselves by providing different levels of service and by establishing a different online recognition. Closed-form equilibrium solutions are obtained for the different scenarios that may arise in this model. Based on such solutions, we give managerial insights on how e-tailers should position themselves when parameters such as service cost, service levels, and recognition are varied.

Keywords: E-service; Service quality; Price competition; Brand recognition

Article Outline

1. Introduction

2. Theoretical model

2.1. Consumer behavior

2.2. Market segmentation

3. Price equilibrium under service differentiation

3.1. Formal analysis

3.2. Model implications

3.2.1. Effects of service cost

3.2.2. Effects of service differentiation

3.2.3. The adverse price effect of service

3.2.4. Effects of recognition differentiation

4. Price equilibrium under recognition differentiation

4.1. Formal analysis

4.2. Model implications

5. Managerial implications and conclusion

Appendix A. Appendix

References