Oligopolistic price competition and adverse price effect in online retailing markets

Sulin Ba, Jan Stallaert, Zhongju Zhang

Research output: Contribution to journalArticle

15 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)858-869
Number of pages12
JournalDecision Support Systems
Volume45
Issue number4
DOIs
StatePublished - Nov 1 2008
Externally publishedYes

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Keywords

  • Adverse price effect
  • Price competition
  • Service quality
  • Vertical differentiation
  • e-Service

ASJC Scopus subject areas

  • Management Information Systems
  • Information Systems
  • Developmental and Educational Psychology
  • Arts and Humanities (miscellaneous)
  • Information Systems and Management

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