Augmented reality advertising in an e-commerce model with competition

Abstract

• A retailer will only adopt AR advertising if the set-up cost for AR advertising is below a certain threshold. • AR advertising weakens the intermediary’s channel power under the reseller mode. • AR advertising moderates the mitigation of channel mode on double marginalization under the marketplace mode. • The preferred channel mode depends on the magnitude of competition intensity and proportional fee. We consider an e-commerce model with two competing retailers (retailers A and B) and one intermediary, and study the decisions of retailer A on augmented reality (AR) advertising given that the other retailer (retailer B) has adopted AR advertising. We investigate both retailers’ optimal AR advertising level under two channel modes: the reseller mode and the marketplace mode. We find that, under both channel modes, retailer A will follow retailer B in the use of AR advertising only if the set-up cost for AR advertising is below a certain threshold that decreases in competition intensity. Also, retailer A’s adoption of AR advertising as a follower can always benefit retailer B and the intermediary. We also identify the impact of AR advertising on the supply chain performance under different channel modes. Under the reseller mode, AR advertising weakens the intermediary’s channel power such that the intermediary may not benefit from a fierce upstream competition; whereas, under the marketplace mode, AR advertising moderates the mitigation of channel mode on double marginalization so that the intermediary does not necessarily benefit from a higher proportional fee. Our comparison of the supply chain members’ performance under the two channel modes reveals that the preferred channel mode depends on the magnitude of competition intensity and proportional fee.