Note on self-restraint as an online entry-deterrence strategy

Note on self-restraint as an online entry-deterrence strategy

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Article ID: iaor20081182
Country: United States
Volume: 52
Issue: 11
Start Page Number: 1799
End Page Number: 1809
Publication Date: Nov 2006
Journal: Management Science
Authors: , ,
Keywords: game theory, e-commerce
Abstract:

We develop a game-theoretical model to show that in the markets where price consistency across channels is critical, an incumbent brick-and-mortar retailer can deter the online entry of a pure-play e-tailer by strategically refraining from entering online. In the markets where price consistency is not a constraint, we find that the incumbent can deter the e-tailer's entry only if it enters online and credibly operates the onllne channel as an independent profit center. In other words, the incumbent must be willing to cannibalize its own brick-and-mortar business by charging a low online price. We also discuss some social welfare implications of retail online entry and the managerial insights of our analysis.

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