Oligopolistic Price Competition and Adverse Price Effect in Online Retailing Markets

29 Pages Posted: 13 Jan 2017

See all articles by Sulin Ba

Sulin Ba

University of Connecticut School of Business

Jan Stallaert

University of Connecticut - School of Business

Zhongju Zhang

Arizona State University (ASU) - Department of Information Systems

Date Written: January 1, 2008

Abstract

The majority of theoretical vertical differentiation models in the literature derive equilibrium prices that exhibit what we call an “adverse price effect:” for a low quality firm, the equilibrium price may decrease when the product quality increases. This seemingly counterintuitive theoretical result has received little attention in the literature. In order to check whether this result is simply an artifact of model assumptions (such as a duopoly under absence of differentiation costs), we present an oligopoly model with a general cost structure, and derive closed-form solutions for two special cases. Our model shows that the adverse price effect continues to hold in a more general setting and we derive conditions under which such an adverse price effect occurs. We then attempt to find empirical evidence of this phenomenon using data from the online retailing (e-tailing) industry where e-tailers selling identical products mainly differentiate with their service offerings. Our analytical and empirical results offer guidelines to e-tailers on how to price their products and decide their service offerings. The results may also have implications for firms in other industries that are characterized by vertical differentiation.

Keywords: Price competition, Vertical differentiation, e-Service, Service quality, Adverse price effect

Suggested Citation

Ba, Sulin and Stallaert, Jan and Zhang, Zhongju, Oligopolistic Price Competition and Adverse Price Effect in Online Retailing Markets (January 1, 2008). Available at SSRN: https://ssrn.com/abstract=2853900 or http://dx.doi.org/10.2139/ssrn.2853900

Sulin Ba (Contact Author)

University of Connecticut School of Business ( email )

368 Fairfield Road
Storrs, CT 06269-2041
United States

Jan Stallaert

University of Connecticut - School of Business ( email )

368 Fairfield Road
Storrs, CT 06269-2041
United States

Zhongju Zhang

Arizona State University (ASU) - Department of Information Systems ( email )

400 E Lemon St
Tempe, AZ AZ 85287
United States

HOME PAGE: http://https://apps.wpcarey.asu.edu/directory/people/profile.cfm?person=2259040

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