Distribution Channel Management in an Internet Age: Equilibrium and Social Welfare

This paper considers the conditions under which a monopoly manufacturer selling through independent retailers in a spatial market will add an Internet distribution channel (an e-channel), and analyzes the effect this would have on consumer surplus and social welfare. We find that an e-channel will be added only if consumer??s travel costs are high and the e-retailer??s delivery costs are low. Such double-channel operation will decrease consumer surplus if in the pre-entry case the market is fully covered by brick-and-mortar retailers. If instead the market is partially covered and delivery costs are sufficiently high, it will not decrease any consumer??s surplus. When delivery costs are low, social welfare will be improved by profitable double-channel operation even if consumer surplus is harmed by it. Finally, double-channel operation could be Pareto superior even if delivery costs are high.     

Quality-adjusted price comparison of non-homogeneous products across Internet retailers

This study compares prices offered by multiple Internet retailers. This task is challenging because e-tailers cannot present their entire assortments to each consumer. Therefore, the quality of the product assortments presented by different e-tailers to each consumer is not directly comparable on an item-by-item basis, resulting in non-homogeneous offerings across retailers. We further consider the interaction between retailers (product information presentation format) and consumers (product information search strategies), which makes price comparisons among the retailers even more non-homogeneous. To grapple with this quality-adjusted price comparison problem for non-homogeneous products, we use a stochastic-frontier hedonic-price regression model to find the “lowest” theoretical price for a product given its characteristics. We then assess the price efficiency of the product as the ratio between this lowest price and the offered market price. This framework allows for the comparison of retailers in their ability to offer the “best deals” even when their actual assortments are not directly comparable in quality. Moreover, this framework provides Internet retailers with a relative measure of price efficiency. This helps them understand when and where they offer competitive prices to consumers. We illustrate our approach empirically in a comparison of price efficiency among three major Internet travel agents on a sample of posted itineraries and airfares. Furthermore, we demonstrate that the price efficiency of an Internet travel agent depends on the format of its website and on consumers' search strategies.     

A comparative analysis of marketing promotions and implications for data analytics

Retailers use many different marketing promotions to increase sales and profits. These promotions include price reductions, coupons, cash mail-in rebates, free gift cards, and buy-one-get-one (BOGO) discounts. The type of promotion used results in different outcomes for demand, profit, average price, consumer surplus, and sales taxes collected. We perform comparative analysis of these five promotions and their outcomes. We show that for the same discount amount, price reductions result in the lowest average price. For products with weakly diminishing consumer utility and low consumer stockpiling, BOGO promotions result in the largest demand, profit, consumer surplus, and taxes collected. Cash mail-in rebates may result in large profit and taxes collected, but they perform poorly in terms of average price paid and consumer surplus. We also find that a retailer offering a delayed incentive (i.e. gift cards and mail-in rebates) offers a larger reward but provides lower consumer surplus than when offering an immediate incentive (i.e. price reduction and BOGO). In a segmented market with a price-insensitive consumer segment, immediate incentives have the disadvantage of allowing price-insensitive consumers arriving during the promotion to obtain the discount, which reduces the discount effectiveness. The addition of more retailer objectives to maximizing profit, such as demand maximization or consumer surplus, increases the effectiveness of immediate incentives. We also provide a framework for estimating the important parameters for evaluating promotion effectiveness using readily available transactional data and examine its accuracy using a simulation experiment.     

An empirical assessment of the welfare effects of reciprocal dumping

Can two-way trade in similar products lead to lower welfare than if such trade was banned? Theory answers yes. To empirically investigate this proposition we examine Swedish imports of bottled water. Assuming one-shot (Bertrand and Cournot) competition, we can use the estimates from a structural model of demand to uncover marginal costs. We simulate the effect on consumer and producer surplus of banning imports. We do not find convincing evidence that banning imports would increase overall welfare. Given our choice of market this suggests we should not be overly concerned with the welfare effects of two-way trade in consumer goods that are close to homogenous.     

See How Much We’ve Sold Already! Effects of Displaying Sales and Stock Level Information on Consumers’ Online Product Choices

Many online retailers make sales and stock level information live available to customers on their websites and offline retailers also increasingly can display this information. Yet it is unclear how consumers perceive such information and how it influences consumer choice. High sales and low stock may both signal popularity and quality, which will stimulate further sales. We however argue that sales level is more diagnostic than stock level as a cue and hence the effect of sales level on consumer choice will be stronger than that of stock level. Also, when both cues are available, the effect of sales level is expected to dominate. In addition, brand familiarity is expected to moderate these effects. These hypotheses are tested in two scenario-based online experiments in which participants choose between competing products for which information about either sales levels, stock levels, or both sales and stock levels is displayed. Results support the hypotheses and also show that sales level is indeed a more diagnostic cue than stock level. Analyses further reveal how perceptions of the popularity and quality of a product mediate the effects of sales and stock levels on consumer choice. The findings imply that retailers can successfully use sales and stock level information to induce quality perceptions and influence consumer choices.     

From Fatwallet to eBay: An investigation of online deal-forums and sales promotions

Sales promotions are an important part of retail advertising strategy. Traditionally, research on sales promotions has generally assumed that the buyers are end consumers who do not engage in reselling, in large part due to high transaction costs. However, the recent Internet related technologies have dramatically lowered the cost of transferring goods between consumers, leading to relative ease of reselling activity amongst individual consumers. Little is known about the impact of this phenomenon on retailer's sales promotion strategy. In this research we investigate the reselling activity in online auctions for products that active deal seekers can obtain at deeply discounted prices from retailers. We further investigate the role of deal-forums in the resale process. Data is collected from an online deal-forum (http://www.fatwallet.com/) and eBay to test various reselling-related hypotheses. The results show that there is a significant abnormal increase in the number of newly posted auctions of a product after the deal information of this product is posted on deal-forum website. We also find that there is a significant price incentive for individuals to resell. The implications for sales promotion research and practice are discussed.     

Price-aware enhanced dynamic recommendation based on deep learning

Price is one of the essential elements influencing consumer purchase behavior. Like consumers’ preferences in products, their price preferences also dynamically change over time. However, dynamic price preferences haven’t been fully considered in existed recommendation studies. In this study, we propose a deep learning-based dynamic recommendation model by considering consumers’ dynamic preferences in both product and price. We specially design a review-and-rating-based sequence generator to select products whose prices the consumers are satisfied with to form the new purchase sequence. We also develop a multi-level attention mechanism in the transformer layer to explore the correlations between consumers’ price choices and to combine the price preferences with the product preferences. Experimental results show the proposed model outperforms the state-of-the-art models on some real-world datasets. Our findings can help retailers understand consumers’ price preferences and make informed decisions related to pricing, discounting, and bundle sales strategies.     

Joint In-Season and Out-of-Season Promotion Demand Forecasting in a Retail Environment

Inaccurate forecasts of demand during promotions diminish the already meager profit margins of retailers. No forecasting method described in the literature can accurately account for the combination of seasonal sales variations and promotion-induced sales peaks over forecasting horizons of several weeks or months. We address this research gap by developing a forecasting method for seasonal, frequently promoted products that generates accurate predictions, can handle a large number of sales series, and requires minimal training data. In our method's first stage, we forecast the seasonal sales cycle by fitting a harmonic regression model to a decomposed training set, which excludes promotional and holiday sales, and then extrapolate that model to a testing set. In the second stage, we integrate the resulting seasonal forecast into a multiplicative demand function that accounts for consumer stockpiling and captures promotional and holiday sales uplifts. The final model is then fitted using ridge regression. We use sales data from a grocery retailing chain to compare the forecasting accuracy of our method with popular seasonal and promotion demand forecasting models at multiple aggregation levels for both short and long forecasting horizons. The significantly more accurate forecasts generated by our model attest to the merit of the approach developed here.     

It's not only what they buy,it's also what they keep: Linking marketing instruments to product returns

Online retailers implement various marketing instruments to boost their sales. These marketing instruments can not only impact sales, but also product returns. However, when assessing the performance of marketing instruments, retailers often ignore potential return effects. Theoretically, marketing instruments could increase or decrease returns, depending on how they affect expected and experienced costs and benefits related to a product. In this paper, we empirically examine whether, and how a comprehensive set of marketing instruments (newsletters, catalogs, coupons, free shipping, paid search, affiliate advertising and image advertising) affects product returns. We use data from two major online retailers and show that return effects vary largely across marketing instruments. Surprisingly, none of the instruments reduces product returns. Newsletters, paid search, catalogs and free shipping increase returns substantially by up to 18%. For free shipping and catalogs, the return effects emerge prevalently for fashion categories, whereas online advertising and newsletters increase returns of both fashion and non-fashion products. These findings enhance our understanding of how firm-initiated marketing instruments affect returns and provide guidance for online retailers in multimedia environments.     

Shopper-Facing Retail Technology: A Retailer Adoption Decision Framework Incorporating Shopper Attitudes and Privacy Concerns

Continual innovation and new technology are critical in helping retailers’ create a sustainable competitive advantage. In particular, shopper-facing technology plays an important role in increasing revenues and decreasing costs. In this article, we briefly discuss some of the salient retail technologies over the recent past as well as technologies that are only beginning to gain traction. Additionally, we present a shopper-centric decision calculus that retailers can use when considering a new shopper-facing technology. We argue that new technologies provide value by either increasing revenue through (a) attracting new shoppers, (b) increasing share of volume from existing shoppers, or (c) extracting greater consumer surplus, or decreasing costs through offloading labor to shoppers. Importantly, our framework incorporates shoppers by considering their perceptions of the new technology and their resulting behavioral reactions. Specifically, we argue that shoppers update their perceptions of fairness, value, satisfaction, trust, commitment, and attitudinal loyalty and evaluate the potential intrusiveness of the technology on their personal privacy. These perceptions then mediate the effect of the technology on shopper behavioral reactions such as retail patronage intentions and WOM communication. We present preliminary support for our framework by examining consumers’ perceptions of several new retail technologies, as well as their behavioral intentions. The findings support our thesis that shopper perceptions of the retailer are affected by new shopper-facing technologies and that these reactions mediate behavioral intentions, which in turn drives the ROI of the new technology.     

Optimal retail sales strategies for old and new products in monopoly and horizontal competition scenarios

Advances in technology have made product updates more frequent and allowed consumers to choose different versions of the same product based on their preferences. It is crucial for retailers to understand how to formulate optimal sales strategies based on those different consumer preferences. To this end, we develop game models that consider the heterogeneity of consumer preferences under both monopoly and horizontal competition scenarios and perform the sensitivity analysis to examine the impact of consumer proportions and consumer preferences on retailers’ sales strategies. The results show that (i) regardless of competition or monopoly status, the original retailer can always maximize profit by setting prices based on the market share of traditional consumers, as long as the retailer sells both new and old versions of the product; (ii) the greater the competitive advantage of the competitor, the more advantageous the hybrid sales mode; (iii) if the price of the old product is below a certain threshold, there will be a positive profit for the original retailer when selling both the old and new products; and (iv) when consumer acceptance of competing retailers is lower, entering the retail market is not a good choice for competing retailers.     

Are consumers more rational and informed purchasers during recession periods? The role of Private Labels and retailing strategies

This paper aims to investigate how economic crisis changes consumer behaviour and mass retailers’ strategies, the interrelationship of these changes, and how Private Labels (PLs) can influence and be used in this process. The authors analysed data collected from 535 consumers and carried out statistical processing (ANOVA, cluster, etc.) to detect changes in the selection of the retailer, potential variations in the selected brand for various categories of food and non-food products, changes in preparation activities and behaviours prior to and during the purchase (leaflets, internet, promotions, coupons, etc.). Results indicate that consumers have noticeably moved to discount and ELP-based retailers, to PL products, increased the use of Internet to prepare and make purchases and, furthermore, they feel good with the decisions they’ve taken even after the recession, and want to continue doing so. The rising sales of discounters and PLs confirm that economic crisis boosts changes both in consumer behaviour and the retailing sector. Findings highlight the importance of some retailers’ strategies to face adverse economic situations and how PLs can be used as game-breakers, as they are preferred by consumers in these situations.     

Exploiting the installed base using cross-merchandising and category destination programs

We investigate two ways to increase sales and customer loyalty by taking advantage of a store's installed base of current customers. We propose a classification of products into two types. Products of Type 1 are products for which consumers have a loyalty to a specific retailer and, as far as possible, always shop at that retailer for these products. The other products (Type 2) are not associated with any retailer and are bought at whichever retailer consumers happen to shop when they plan or remember to buy the product. With this in mind, we test the potential of two marketing tools to help retailers increase their share of sales of the Type 2 segment. Using a category destination program we show that one can successfully transform Type 2 into Type 1 products. Using cross-merchandising promotions, we show that one can increase the sales of Type 2 products thereby gaining a larger share of discretionary purchases than what one would receive from a straight random allocation. Both series of tests yielded significant increases in sales and profits and were deemed successful by the retailers who implemented them.     

Online marketing: When to offer a refund for advanced sales

Advance selling is a marketing strategy commonly used by online retailers to increase sales by exploiting consumer valuation uncertainty. Recently, some online retailers have started to allow refunds on products sold in advance. On the one hand this reduces the net advance sales, but on the other hand it allows a higher advance sales price. This research is the first to explore the overall effect of allowing a refund on profits from advance sales, identifying conditions where advance selling with or without refunds (or no advance selling at all) is best. We analytically compare the profits of three advance selling strategies: none, without refund, and with refund. We show that selling in advance and allowing a refund is optimal for products with a relatively small profit margin and small strategic market size, and that the added profit can be considerable. Our results guide managers in selecting the right advance selling strategy. To facilitate this, we graphically display, based on the two dimensions of regular profit margin and strategic market size, under what conditions the different strategies are optimal.     

A Comparison of Buyback and Trade‐In Policies to Acquire Used Products for Remanufacturing

We study how acquisition policies for used products as a source for a remanufactured consumer product affect system performance. We introduce a consumer choice model of new product purchase and used product return, which is consistent with the classic Bass diffusion model of sales over time. We capture new and remanufactured product sales, the evolution of the install base, and consumer return and repurchase decisions over the life cycles of new and remanufactured product. Our analyses lead to two main findings on the acquisition policies. First, if the buyback price is less than the margin of a new product, then a trade‐in policy is likely to yield higher profit than a buyback policy. Second, we show that the profitability is highest when the time lag between the introduction of a new product and initial demand for a remanufactured version of the product is at or near the sweet spot, which is the age of the product at which the costs of acquisition and remanufacturing are at minimum. Further, when the time lag between the introduction of a new product and initial demand for its remanufactured version is near the sweet spot, then simple pricing methods are close to optimal.     

How does customer recognition affect service provision?

We examine how channel members’ ability to recognize repeat and new customers affects service provision, profits, and welfare. In decentralized channels, when only retailers can recognize customers, customer recognition increases service levels. However, in centralized channels or decentralized channels when both manufacturers and retailers can recognize customers, customer recognition reduces (increases) service levels if service investment persists (diminishes) sufficiently over time. Moreover, in centralized channels, customer recognition reduces firm profits and consumer surplus, whereas in decentralized channels, when manufacturers and retailers can recognize customers, customer recognition increases channel members’ profits but decreases consumer surplus.     

Does Online Information Drive Offline Revenues?: Only for Specific Products and Consumer Segments!

While many offline retailers have developed informational websites that offer information on products and prices, the key question for such informational websites is whether they can increase revenues via web-to-store shopping. The current paper draws on the information search literature to specify and test hypotheses regarding the offline revenue impact of adding an informational website. Explicitly considering marketing efforts, a latent class model distinguishes consumer segments with different short-term revenue effects, while a Vector Autoregressive model on these segments reveals different long-term marketing response.We find that the offline revenue impact of the informational website critically depends on the product category and customer segment. The lower online search costs are especially beneficial for sensory products and for customers distant from the store. Moreover, offline revenues increase most for customers with high web visit frequency. We find that customers in some segments buy more and more expensive products, suggesting that online search and offline purchases are complements. In contrast, customers in a particular segment reduce their shopping trips, suggesting their online activities partially substitute for experiential shopping in the physical store. Hence, offline retailers should use specific online activities to target specific product categories and customer segments.     

CONSUMER DIRECT FULFILLMENT PERFORMANCE IN INTERNET RETAILING: EMERGENCY TRANSSHIPMENTS AND DEMAND DISPERSION

The collaborative fulfillment of consumer orders by Internet retailers and wholesalers has proven important in the realization of sustainable levels of online profitability. Concentrating on consumer direct fulfillment (or drop shipping), an empirical simulation model evaluates avenues for improving logistical performance. The empirical simulation model centers on the online music CD retailing industry. It evaluates the effects of emergency transshipments and demand dispersion on inventory and product‐release performance, as well as on transportation costs, in consumer direct fulfillment operations. Results show that emergency transshipments improve inventory and product‐release performance in these operations. Furthermore, the inventory‐performance improvements are maximized when inventory facilities fulfill demand that is uniformly balanced across markets primarily assigned to each facility. Finally, gains in inventory and release performance obtained from emergency transshipments outweigh additional transportation costs incurred from a greater reliance on emergency transshipments for consumer direct fulfillment.     

Clicks and Mortar: The Effect of On-line Activities on Off-line Sales

Retailers did not immediately extend their business to the Internet environment, fearing that on-line activities could adversely impact their off-line sales. To facilitate assessment of the impact of on-line activities on off-line sales, we develop a method that allows retailers to use readily available market data for making informed decisions. The proposed method determines (1) the extent to which on-line sales cannibalize off-line sales, and (2) whether on-line activities build on-line equity for the firm. We illustrate the method using data from Tower Records' Internet sales division. We find that on-line sales do not significantly cannibalize retail sales and that the firm's web activities build long-term on-line equity. While the proposed method can be used by any clicks-and-mortar firm, our firm-specific results indicate that Towers' fears regarding cannibalization due to its own Internet activities were unfounded.     

Drivers of the synergy between price cuts and store flyer advertising at supermarkets and discounters

Despite retailers’ intense use of both price cuts and store flyer advertising, it is still unclear whether and when it is beneficial for retailers to combine the two promotion tools at the same time as opposed to using them separately. We systematically investigate synergies between price cuts and store flyers for a broad set of 488 brands from 44 consumer packaged goods categories across six leading German retailers. We find that a clear majority of the brands benefit from positive synergies and hence, combining price cuts and store flyer advertising is recommended, especially at supermarkets. This synergy can be strong. For instance, a 15 % price cut without store flyer support at a supermarket, on average, increases sales by 11 %, and medium spending on store flyers for the brand at its regular (non-promoted) price results in a sales lift of 8 %. The combined use of both tools, however, increases sales by 52 %, much more than the sum of their separate effects (11 % + 8 % = 19 %). Yet, there is also substantial variance in the synergy, which we explain with retailer format (supermarkets versus discounters) as well as various brand and category characteristics. Our findings have important implications for the coordination of promotion activities by retailers.