An increasing number of merchants sell products through dual channels on a platform, whose services (such as marketing, operations, warehousing, and payment) significantly enhance market demand. Sellers (merchants and platforms) can ride the service efforts of another channel for free, which is unexplained by existing theories. This paper develops a game to study the online channel structure on retail price and service effort. We systematically identify four strategic scenarios: single channel (resale and agency), independent dual channels, dual channels with unidirectional free-riding, and dual channels with bidirectional free-riding. Opening dual channels from a single channel can offer valuable flexibility to startups and merchants, but it can also intensify competition between channels. We emphasize the flexibility of dual channels, as a low commission allows companies to transfer sales between channels, alleviating the inefficiency of double marginalization and increasing the motivation for the platform to strive to provide diversified services. Conversely, under a high commission rate, it is not feasible to open up dual channels, whether to prevent wholesale price hikes or to suffer from the failure of service effort incentives, especially when the platform engages in free-riding. The free-riding of online dual channels has dual characteristics in terms of direction and effect. When the merchant free-rides, the level of service effort and sales improve, but the service decentralization effect is disrupted by the strategic increase in wholesale prices as the free-riding intensifies. We confirm that the direction and strength of free-riding behavior should be maintained in a non-linear relationship, benefiting both parties conditionally. Intuitively speaking, one who takes the initiative to free-ride is always better off with the service effort from another channel. The result is not so, as the loss of increased competition caused by merchants through the agency channel is much higher than the increased profits of encroaching on dual channels. The study provides insights for the platform and merchants to guide the services and pricing under the complex free-riding, further adjust channel structure for encroachment and competition.
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