A Model of Vertical Differentiation for Online Retailing

41 Pages Posted: 3 Oct 2006 Last revised: 3 Aug 2014

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: August 1, 2007

Abstract

The Internet has changed the nature of doing business as well as the nature of competition in many industries. The number of online transactions has seen a steady increase as more consumers turn to online retailing (e-tailing) for a wide range of product choices and shopping convenience.

Yet, despite the availability of online comparison shopping sites and the ease of finding alternative e-tailers for a given product, the persistent and substantial price dispersion has not been fully understood.

In this paper, we view the online purchase of a product as a bundle of utilities consisting of the satisfaction with the product itself, the service received from the purchase experience, as well as the assurance and trust associated with the e-tailer's brand recognition. E-tailers, accordingly, can differentiate themselves in the service, brand recognition, and price dimensions. We extend the two dimensional competitive model to three dimensions in which e-tailers sequentially decide on a recognition level, then a service quality, and finally compete on price. We solve the model analytically and obtain closed-form equilibrium solutions. By explicitly incorporating differentiation costs, we show the existence of previously unknown equilibria, among which an asymmetric Max-Max equilibrium that is frequently observed in practice. In addition, the e-tailer's optimal competitive strategy is determined by the structure of the differentiation costs.

Keywords: e-service, service quality, price competition, vertical differentiation, competitive strategy

JEL Classification: C70, D40, L12, L82

Suggested Citation

Ba, Sulin and Stallaert, Jan and Zhang, Zhongju, A Model of Vertical Differentiation for Online Retailing (August 1, 2007). Available at SSRN: https://ssrn.com/abstract=934359 or http://dx.doi.org/10.2139/ssrn.934359

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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