Pricing strategies for O2O business model considering service spillover and power structures

Abstract

AbstractIn contradistinction to the traditional dual‐channel retail model, the online and offline channels are two business units of a single retailer in an online to offline (O2O) business model. The service‐related effort of the offline channel has a spillover effect on the online channel. This paper establishes three game‐theoretic models to analyze how service spillover and power structures affect supply chain members’ performance in the O2O business model. The main results are as follows. First, a service spillover effect is always beneficial to the manufacturer's profit due to the increasing wholesale price and total demand in all three scenarios. Second, unlike the traditional dual‐channel model, service spillover does not inevitably cause price competition in the O2O dual‐channel model. Under different power structure conditions, the spillover intensity has a significant effect on the retailer's profit and service strategy. When the manufacturer is a Stackelberg leader, the effects of spillover on a retailer's profit depend on online channel acceptance level and service level. A service differentiation strategy can help the retailer increase profit margins under certain situations. When the manufacturer and retailer have the same power, retailer's profit increases with spillover intensity, and a service consistency strategy can be implemented. When the retailer is a Stackelberg leader, the retailer's profit decreases first and then increases, and a service mixed strategy will reduce the loss of retailer's profit. Finally, the switch in dominant power between manufacturer and retailer has no impact on retail prices and demand. The total supply chain profit in two Stackelberg models is also equivalent, but lower than that in the Nash model.