Dual-channel competition: the role of quality improvement and price-matching

Abstract

Quality improvement and price-matching are two commonly used competing strategies by the retailers. However, it is still unclear how the retailers should deliberate over the two strategies when selling in both online and offline markets. In this paper, we consider two dual-channel retailers selling a substitutable product to consumers in both online and offline markets. Especially, the retailers compete in the online market, and their offline markets are exclusive to themselves. We establish a game-theoretical model to investigate the trade-off between quality improvement and price-matching in competition, and the impact on retailers' profits and consumer surplus in the dual-channel market structure. The analysis shows that, first, a retailer should choose to improve its quality to avoid price competition when the online market is small; second, when retailers engage in price competition, the retailer with larger offline market is more willing to adopt price-matching, while the retailer with a small share of offline market can be hurt; third, quality improvement can always increase the consumer surplus, while price-matching always hurts consumer surplus due to price collusion.