Target: Pricing and Channel

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Yan, Ruiliang. “Pricing strategy for companies with mixed online and traditional retailing distribution markets”. Emerald Group Publishing, Limited. Business And Economics--Marketing And Purchasing. Santa Barbara, United Kingdom. 2008. Pp 48-56. Scholarly Journals. When a company employs a multi-channel strategy, an important question is what pricing strategy should be adopted so that the company can optimize its profit. In our research we focus on the pressing question of a multi-channel pricing strategy under different market structures. We use a game theory model to specifically study the following questions: Under the Bertrand, Stackelberg and channel integration market structures, what is the optimal pricing strategy that the multi-channel company should adopt? Under which market structure can the multi-channel company draw the largest profit? The rest of our paper is organized as follows. Section 2 provides a summary of the relevant literature. Section 3 presents our modeling framework. Section 4 studies the pricing strategies under three different types of market structures - the Bertrand, the Stakelberg and the channel integration structures - and shows the important findings. Section 5 illustrates our findings by means of numerical examples. A conclusion and managerial implications are presented in Section 6. 2. Literature review

In this section, we review the relevant marketing literature to position our paper. We review some of the papers that examine issues that arise when firms sell product through multiple channels. In particular, we focus on those papers that explicitly account for the presence of the online channel. 2.1 Multi-channel retailing

The growth of multi-channel retailing is an off-shoot of the growth of online marketing. The proportion of multi-channel shoppers has gone up in recent years ([31] Wallace et al. , 2004). A recent analysis of online retail sales by the management consulting firm McKinsey indicates that multi-channel retailers accounted for over 50 per cent of internet sales, compared to the 31 per cent garnered by retailers who sell online exclusively ([11] Grosso et al. , 2005). The growing popularity of multi-channel retailing can be attributed to the benefits received by the consumers as well as the retailers. The greater utilitarian value of online stores in the context of information search and price comparison has been hypothesized by [21] Noble et al. (2005). However, their empirical results indicated that while customers derived greater utility from the online stores in comparison to catalogs, physical stores provided the greatest utility in regard to price comparisons. But it is possible for consumers to use the different channels in order to maximize the utility. The portfolio of service outputs expected by customers of multi-channel retailers in fact increases as customers gain more experience ([31] Wallace et al. , 2004). The benefits accruing to the retailers have been discussed by many marketing scholars. The review of online price dispersion by [23] Pan et al. (2004) provides theoretical as well as empirical evidence regarding the higher prices charged by multi-channel retailers in comparison to pure-play online retailers. The price differential is justified by the higher service outputs provided by multi-channel retailers. According to the empirical study conducted by [16] Kumar and Venkatesan (2005), the benefits provided by multi-channel customers include higher revenues, higher share of the wallet, greater profits, and an increase in the likelihood of future purchases. The multi-channel loyalty framework proposed by [31] Wallace et al. (2004) suggests that the greater service outputs provided by the multi-channel retailers lead to greater customer satisfaction, which in turn results in greater customer loyalty to the retailer. Multi-channel retailing gives...
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