Social Network Enabled Channels vs Direct Channels: A Competitive Framework
Posted: 6 Oct 2015
Date Written: April 1, 2015
Social networks are one of the most exciting recent developments that have influenced the relationships between individuals and between individuals and organizations. While these networks offer companies a convenient avenue for communication with and among consumers, they also offer a compelling channel for commerce. However, due to its relative infancy as well as the myriad data and security related concerns expressed by consumers about social networks, retailers have been slow to dive into social networks as a sales channel. Our research sheds light on the question of when retailers should consider adding a social network channel to their existing channel architecture. Set in a two-retailer competitive set up, we find that a retailer's choices will be driven by a non-trivial interaction between consumer preferences for brands and channels, as well as the retailer's cost advantage relative to its competitors. We find conditions under which both retailers will be of one mind and offer only the direct (online) channel or, less frequently, both the direct and social network channels. In other situations, they will maximally differentiate; one will offer only the direct channel, and the other, both (or only the social network channel). In general, we find that when consumer preferences for channels are significant, channel differentiation offers a useful dimension for retailers to achieve market share and profits, without sacrificing contribution margins. A few exceptions aside, the leader retailer rarely introduces the social network channel. The follower retailer is left to differentiate by introducing the social network channel, but bears the technology cost of doing so.
Keywords: Online channels, social networks, security/privacy issues, competition/game theory
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