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: | Gupta Sunil, Zhang Z. John, Liu Yunchuan |
Keywords: | game theory, e-commerce |
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.