The optimal pricing and service strategies of a dual-channel retailer under free riding

Abstract

<p style='text-indent:20px;'>Free riding refers to that in a multi-channel market, consumers enjoy the presale service of a product at one channel but purchase the product at another channel. In this paper, we study the optimal pricing and service strategies for a dual-channel retailer, who sells a product through both a traditional retail channel and an online channel. We assume that the offline channel provides the presale service but the online channel does not. We investigate how the changes of the degree of free riding affect the pricing/service strategies and profits of the two channels under three different scenarios: Stackelberg competition, Bertrand competition and channel integration. Our analysis shows that when the dual-channel retailer operates the two channels separately, no matter under which competitive scenario, free riding has a negative effect on both channels. And it is much more beneficial for the dual-channel retailer to let one channel work as a leader and another channel as a follower than to let the two channels make their decision simultaneous. In contrast, when the dual-channel retailer runs the two channels jointly, i.e., employs the channel-integration scenario, free riding may be beneficial to the retailer. Finally, this paper proposes and analyzes a revenue-sharing contract to coordinate a decentralized dual-channel retailer to achieve beneficial outcomes for both channels.</p>