Analyzing a Hybrid Firm's Pricing Strategy in Electronic Commerce when Channel Migration Occurs

Abstract

Achieving effective business design across the Internet and the offline channel is a critical concern for a hybrid firm's choice of pricing strategy. To examine the effects of consumer channel migration - a form of one-way channel interaction from the traditional sales channel to the Internet - on pricing strategy, we propose two types of pricing models. One has no interaction between the Internet and offline channels. The other includes the possibility of one-way migration to the Internet channel, and incorporates consumers' channel switching costs and loyalty to the firm. The two models offer interesting results for understanding traditional and Internet-based selling. A high level of channel migration leads a firm to manage two channels as one. With low channel migration, in contrast, the firm should separately optimize and manage each channel. By comparing the results, we obtained two main findings. First, the level of channel migration determines a hybrid firm's pricing strategy. Second, the hybrid firm's price level choice should be determined by the online demand proportion of its business. We validated these modeling results with the business cases of well-known firms from the United States and empirical analysis for ten large South Korean e-commerce firms, by comparing the prices in different product categories for various types of hybrid firms and Internet-only firms. This research offers new marketing strategy insights for managers of the hybrid firm who wish to optimize price-setting decisions based on interactions between distribution channels and the intensity of the firm's involvement in the online channel.