Price promotion considering the reference price effect and consumer loyalty: Competition between first-party and third-party retailers

Abstract

This paper investigates price promotions by first-party and third-party retailers considering the influence of the external reference price effect and consumer loyalty. We show how they interactively shape the two retailers’ promotion decisions, along with equilibrium prices and promotional depths. We analyze a game-theoretical model and reach several interesting findings: first, only when consumer loyalty of the two retailers is more balanced and the reference price effect is sufficiently strong, will both retailers promote in equilibrium; otherwise, only one retailer promotes. Second, retailers’ profits are always harmed by promotion when both of them promote. In contrast, with only one retailer engaging in price promotion, both retailers may draw higher profits. Finally, consumer surplus is always enhanced when both retailers promote but harmed when only the first-party retailer promotes. While when only the third-party retailer promotes, consumer surplus may increase when consumer loyalty asymmetry is relatively low and the reference price effect is strong. Our research sheds light on retail competition and helps to improve price promotion efficiency.