The Impact of Internet Referral Services on a Supply Chain

48 Pages Posted: 27 Jan 2003

See all articles by Anindya Ghose

Anindya Ghose

New York University (NYU) - Leonard N. Stern School of Business

Tridas Mukhopadhyay

Carnegie Mellon University - David A. Tepper School of Business

Uday Rajan

Stephen M. Ross School of Business, University of Michigan

Abstract

In many industries, Internet referral services, hosted either by independent third-party infomediaries or by manufacturers, serve as digitally enabled lead-generators in electronic markets, directing consumer traffic to downstream retailers in a distribution network. This reshapes the extended enterprise from the traditional network of upstream manufacturers and downstream retailers, to include midstream third-party and manufacturer-owned referral servics in the supply chain. We model competition between retailers in a supply chain with such digitally- enabled institutions, and consider their impact on the optimal contracts between the manufacturer, referral intermediary and the retailers. Offline, retailers face a higher customer discovery cost. In return, they can engage in price discrimination based on consumer valuations. Online, they save on the discovery costs, but lose the ability to identify consumer valuations. This critical tradeoff drives firms' equilibrium strategies. We derive the optimal contracts for different entities in the supply chain and highlight how these contracts change with the entry of independent and manufacturer-owned referral services. The establishment of a referral service is a strategic decision by the manufacturer. It leads to a diversion of supply chain profit from a third-party infomediary to the manufacturer. Further, it enables the manufacturer to respond to an infomediary, by giving itself a greater flexibility in setting the unit wholesale fee to the profit maximizing level. Both third-party and manufacturer-sponsored referral services play a critical role in enabling retailers to discriminate across consumers different valuations. Retailers use online referral services to screen out low valuation consumers, and sell only to high valuation consumers in the online channel. Our model thus endogenously derives a correlation between consumer valuation and online purchase behavior. Finally, we show that under some circumstances, it is too costly for the manufacturer to eliminate the referral infomediary.

Keywords: Internet Referral Services, Electronic Markets, Price Dispersion, Franchise Fees, Discovery Costs, Electronic Intermediary, Digital Supply Chain

JEL Classification: L11, L13, D40, D43

Suggested Citation

Ghose, Anindya and Mukhopadhyay, Tridas and Rajan, Uday, The Impact of Internet Referral Services on a Supply Chain. Information Systems Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=361046 or http://dx.doi.org/10.2139/ssrn.361046

Anindya Ghose (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

Tridas Mukhopadhyay

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-2307 (Phone)

HOME PAGE: http://web.gsia.cmu.edu/display_faculty.aspx?id=102

Uday Rajan

Stephen M. Ross School of Business, University of Michigan ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
734-764-2310 (Phone)

HOME PAGE: http://webuser.bus.umich.edu/urajan

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