Pricing and rebate strategies for an e-shop with a cashback website

Abstract

A cashback website (CW) is a type of reward website that pays its members a rebate when they purchase goods via affiliate links. The website receives a commission from an e-shop when a customer makes a purchase by following a link instead of visiting the e-shop directly. With the rapid rise in e-shops, CWs are becoming increasingly popular. However, these CWs’ value to e-shops is still somewhat unclear, in both theory and practice. To clarify the process, we consider a system in which an e-shop sells a product to consumers and a CW provides the link to the e-shop. Based on consumers’ utility, we develop a model to study the value of the CW to the e-shop in both centralized and decentralized settings, and demonstrate and compare the two parties’ optimal strategies and their corresponding profits in both settings. Our main findings are as follows: (1) The CW can always bring the e-shop more profits, whether the setting is centralized or decentralized, by playing the role of price discrimination. (2) In contrast to the centralized setting, the decentralized setting does not lead to a higher sales price; in many cases, it offers a lower sales price, which is opposite of the case typically seen in traditional supply chain literature. (3) Compared with the decentralized setting, the centralized setting does not allow all consumers to have more consumer surplus—which, again, differs from traditional supply chain literature—but rather yields more total profit to the system, which implies that it is better for the e-shop to have its own CW than to use a third-party CW. (4) The degree of decrease in utility for consumers who buy via the CW significantly influences both parties’ pricing strategies. More interesting is that a smaller degree of decrease in utility for consumers who buy via the CW is always beneficial to the e-shop, but may be detrimental to the CW.