Promotional pricing strategies for platform vendors: Competition between first- and third-party products

Abstract

This study explores a platform's promotional strategies for its first-party products when the third-party seller carries identical products, taking into consideration consumers' redemption cost incurred in searching and using the coupons, gift cards, and so forth. We determine how the platform vendor's promotional pricing strategies vary with the market expansion effect, proportion of the price-sensitive consumers, redemption cost, commission rate charged to the third-party seller, and third-party seller's choice of the promotional campaign. We find that the platform vendor will charge a higher regular price during the promotional period if the market expansion effect is weak or the commission rate is low. Further, although the market expansion effect expands the scale of the price-sensitive consumers, the promotional campaign does not always lead to an increase in the demand for the first-party product when the market expansion effect is weak, or the market expansion effect is moderate and the commission rate is high. When the third-party seller's promotional decision is given, the platform's promotional campaign is more likely to benefit both the platform and the third-party seller as the redemption cost becomes lower or the market expansion effect gets stronger. Finally, after endogenizing the third-party seller's promotional decision, as the market expansion effect intensifies, the outcome that only one player (the platform or the third-party seller) adopts the promotional strategy is more likely to occur as an equilibrium.