Should reputable e-retailers undertake service activities along with sales?

Abstract

With the growth of e-commerce and the elevated service requirements of consumers, e-retailers should carefully evaluate the profitability of delivering product services themselves that were once provided by suppliers. Within this context, we apply game theory to construct a principal-agent model to study a sales and service choice problem faced by an e-retailer. Three strategies are proposed in our paper, pure platform strategy (as the benchmark), resale strategy, and resale plus service strategy. Through comparison and analysis, we find that the sales and service strategy preferences of the e-retailer are influenced by reputation and service costs. Additionally, highly reputable e-retailers tend to provide superior levels of service and prices rather than excessively pursue market demand under the resale plus service strategy. Furthermore, we define the ratio of quality plus service to price as the consumer's performance ratio. Interestingly, reputable e-retailer may bring bad consumer's performance ratio. Moreover, the win-win situation occurs when the e-retailer provides the resale strategy or when the supplier prefers the resale plus service strategy. Our study suggests that e-retailers should make tradeoff between control over services and service costs, and make full use of the advantage of reputation to adjust their income strategy, avoiding blindly pursuing low prices and ignoring the service. In addition, for the supplier, it is appropriate to transfer the service to the e-retailer according to his own conditions.