research-article

Price promotion considering the reference price effect and consumer loyalty: : Competition between first-party and third-party retailers

Authors:

Shoufeng MaAuthors Info & Claims

Volume 175, Issue C

https://doi.org/10.1016/j.cie.2022.108841

Published: 01 January 2023 Publication History

Highlights

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We introduce the external reference price effect and consumer loyalty into price promotion.

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Third-party retailer of lower consumer loyalty is more inclined to promote according to the strength of reference price effect.

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Price promotion by third-party retailer tends more to benefit both retailers.

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First-party retailer’s price promotion is more prone to harm the third-party retailer.

Abstract

This paper investigates price promotions by first-party and third-party retailers considering the influence of the external reference price effect and consumer loyalty. We show how they interactively shape the two retailers’ promotion decisions, along with equilibrium prices and promotional depths. We analyze a game-theoretical model and reach several interesting findings: first, only when consumer loyalty of the two retailers is more balanced and the reference price effect is sufficiently strong, will both retailers promote in equilibrium; otherwise, only one retailer promotes. Second, retailers’ profits are always harmed by promotion when both of them promote. In contrast, with only one retailer engaging in price promotion, both retailers may draw higher profits. Finally, consumer surplus is always enhanced when both retailers promote but harmed when only the first-party retailer promotes. While when only the third-party retailer promotes, consumer surplus may increase when consumer loyalty asymmetry is relatively low and the reference price effect is strong. Our research sheds light on retail competition and helps to improve price promotion efficiency.

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Price promotion considering the reference price effect and consumer loyalty: Competition between first-party and third-party retailers

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cover image Computers and Industrial Engineering

Computers and Industrial Engineering Volume 175, Issue C

Jan 2023

1065 pages

ISSN:0360-8352

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Elsevier Ltd.

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Pergamon Press, Inc.

United States

Publication History

Published: 01 January 2023

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