Competitive coupon promotions: a theory-based model for online retail platforms and third-party sellers

Abstract

In the realm of online retail, third-party sellers (TPSs) are progressively being permitted to offer their products on various platforms, often in exchange for a commission fee. This dynamic creates a natural competitive environment between the platforms and the TPSs. An increasingly prevalent strategy to enhance product competitiveness is the utilization of coupon promotions, which both platforms and TPSs have adopted. This study developed a theoretical model to study the dynamics of a retail system wherein an online platform facilitates the sale of products by a TPS, while simultaneously introducing products of differing quality levels. Four distinct promotion scenarios, based on whether the platform and TPS implement coupon offerings, are examined. The analysis outcomes reveal that coupon promotions initiated by both the platform and TPS result in reduced actual payments from consumers, particularly when the platform’s product holds a quality advantage. Surprisingly, in cases where the TPS’s product boasts a quality advantage, consumer actual payments may be higher in a promotion scenario compared to a non-promotional one. Furthermore, we demonstrate that the platform can leverage the TPS’s promotion efforts, particularly when commission fees and incremental purchases are on the higher side. Intriguingly, in situations where the TPS’s product holds a quality advantage, a co-promotion strategy, as opposed to a sole TPS-promotion approach, emerges as the optimal choice, especially when commission fees are substantial and incremental purchases are limited.