Optimal Policies for E-Commerce Sites with Hybrid Revenue Streams: Differentiated Quality Approach

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In last few years, several e-commerce organizations have adopted the strategy of providing two web sites that differ in quality, subscription fee and level of advertisements. Most of these organizations charge a subscription fee for better quality web site and provide free service at the low quality web site. We develop an optimal control theory based model to study the pricing and advertising strategy of such e-commerce organizations dynamically. Since the pricing and advertising strategy of one site affects the decision of other site, we optimize the decisions of both the sites simultaneously. Moreover, since the decision at one time period affects the decisions of subsequent time periods, the proposed dynamic model provides a global optimal solution. We consider consumers' sensitivity to quality, price and advertisement for finding the optimal price and advertisement levels over time for both the web sites. In order to present important managerial implications, we conduct several sensitivity analyses and provide different analytical and graphical results.