Segmented switchers and retailer pricing strategies

Empirical studies reveal a surprisingly wide variety of price promotion strategies among retailers, even among Internet sellers of undifferentiated homogenous goods such as books and music CD’s. Several empirical findings remain puzzling, particularly that within the same market some small retailers decide to deeply discount, while other small retailers forgo the price-sensitive switchers and price high to play their niche. We present theoretical and empirical analyses that address these varied pricing strategies. Our model of three asymmetric firms shows that under multiple switcher segments, where different switchers compare prices at different retailers, firm-specific loyalty is not sufficient to explain the variety of retailer pricing strategies. We demonstrate that a retailer’s pricing strategy is driven by the ratio of the size of switcher segments for which the retailer competes to its loyal segment size. The relative switcher-to-loyal ratios among retailers explain when a firm is more or less inclined to discount deeply or frequently. We thereby identify when a small firm finds it optimal to play the niche and price high, despite having few loyals, or to discount and go for the switchers. Our analysis reveals several interesting findings, such as a small firm that benefits from strategically limiting its access to switchers. The results of two empirical studies confirm our model’s predictions for varied retailer pricing strategies in the context of Internet booksellers

Theory and evidence on pricing by asymmetric oligopolies

We present an analysis of markets with many asymmetrically positioned retailers that compete for the business of both informed and uninformed customers for a homogenous good, such as software, music, book or a brand-name appliance. We show that two forms of asymmetry, one related to loyal segment sizes of retailers and one related to the positioning of firms, completely explain the observed price dispersion in such markets and the multitude of asymmetrical strategies adopted by retailers. The stochastic dominance of empirical mixed strategy measures is used to test the theory with data on 968 books from 10 online retailers

A model of Internet pricing under price-comparison shopping

An empirical regularity in the price-promotion behavior of retailers of homogenous goods is explained theoretically. Based on this, a model is proposed for price competition in a market for a homogenous good with many asymmetrically positioned retailers. Asymmetry in this context refers to firms having potentially dissimilar loyal and switcher customer numbers that shape their pricing behavior in on-line markets. Incomplete information on the size of these segments results in distinguishable clusters of indistinguishable firms. To analyze these markets, a static game of price competition is developed and solved in an asymmetric oligopoly with numerous clusters of firms. The firms with the smallest ratio of switcher segment size to loyal segment size engage in fierce price competition, whereas the members of all other groups price their goods at reservation price points with no price promotions. This observation is a unique contribution and challenges the perception that all firms in markets for homogenous goods adopt mixed pricing strategies

Segmented Switchers and Retailer Pricing Strategies

Empirical studies reveal a surprisingly wide variety of pricing strategies among retailers, even among Internet sellers of undifferentiated homogeneous goods, such as books and music CDs. Several empirical findings remain puzzling; for example, within the same market, some small retailers decide to discount deeply, whereas others forgo the price-sensitive switchers and price high. The authors present theoretical and empirical analyses that address these varied pricing strategies. A model of three asymmetric firms shows that under multiple switcher segments, in which different switchers compare prices at different retailers, firm-specific loyalty is not sufficient to explain the variety of pricing strategies. The authors demonstrate that a retailer's strategy to discount deeply or frequently is driven by the ratio of the size of switcher segments for which the retailer competes to its loyal segment size. The relative switcher-to-loyal ratios among retailers explain situations in which a small retailer finds it optimal to price high, despite having few loyals, or to discount and go for the switchers. The results of two empirical studies confirm the model's predictions for varied pricing strategies in the context of Internet booksellers. The analyses also present several implications. A small retailer can sometimes benefit from strategically limiting its access to switchers to soften price competition. A midsized retailer can benefit from targeting its switcher acquisition activities toward its larger rival, given the shallower discounts involved. When most switchers widely compare prices, a large retailer should offer few shallow discounts because other firms will more aggressively discount. The importance of switcher segmentation suggests that managers should carefully measure switching behavior in devising pricing strategies

Pricing best sellers and traffic generators: the role of asymmetric cross-selling

Among the many items online retailers sell, some stand out as best sellers and are often sold at considerable discounts. Best seller discounting can encourage customer traffic and the purchase of a basket of other products in the same transaction. Although most studies treat retailers as symmetric, the cross-selling potential is generally asymmetric across retailers, since some online retailers have more products to sell. In addition, the cross-selling effect works both ways – customers intending to buy a best seller may buy other items in their shopping basket, while other customers intending to buy a basket may buy a best seller while visiting the retailer. The authors model the pricing implications of this rich variety of asymmetric cross-selling, with both best sellers and typical baskets acting as traffic generators and cross-sold products. The common wisdom that loss leader pricing leads to neither a significant increase in store traffic nor an increase in profits does not apply in an asymmetric case where one retailer has more products to cross-sell. The cross-selling potential of products even far down the best seller list is demonstrated. Empirical analyses provide support for key findings of the theoretical model using book pricing and sales rank data from multiple online retailers

An extension of Osuna's model to observable queues

In his seminal work, Osuna (1985) defines the psychological cost of waiting as the psychological stress accumulated during the waiting period. He proposes that as individuals wait in idleness they accumulate stress, where the rate of accumulation at a particular moment is represented by the intensity of stress felt by the individual at that moment. We build on the works of Osuna (1985) and Suck and Holling (1997) that show how psychological costs build up in a single wait situation. We consider waiting in observable queues and model how the processing of customers ahead in the queue affects the accumulation of stress. In so doing, we uncover the relationship between the total accumulated stress and the queue characteristics such as the queue length, the mean waiting time in the queue and the variance of the waiting time. We view the total stress accumulated during the wait as a measure of the disutility experienced by the individual during the waiting period and final dissatisfaction at the end of waiting period. Thus, in evaluating the psychological costs of waiting in alternate queueing environments, researchers can focus on the final dissatisfaction as represented by the total stress accumulated during the waiting period