• Posted Nov. 5, 2019

Study: Pricing or advertising? A game-theoretic analysis of online retailing

Problem:

Pricing and advertisement are two of the most important instruments for online retailers (e-tailers) to attract and compete for customers. At the same time, these two dimensions have a considerable impact on the costs and profitability of such firms. Knowing such strategies and their impacts is key in maintaining competitive advantage. In order to attract customers, it is essential to consider not only consumer behavior and market segment, but also competitor`s strategic response.

How it was studied:

The authors conducted their research by developing a game-theoretic model where two e-tailers make use of different advertisement and pricing strategies. This model assumes two e-tailers identical products with a constant marginal cost for the product of each firm. Combined with further assumptions, functions are built for advertisement, buyer behavior, and various pricing strategies. Effects such as market mobility, search costs, and advertisement costs are also considered. Such an assumption takes into account how innovations continually create new opportunities to deliver advertisements in novel and effective ways.

For e-tailers this study offers great managerial implications and opens up the possibility to simulate various different scenarios.

Take away:

The paper presents optimized advertisement and pricing strategies for e-tailers. The result are functions, models and different simulations based on various effects, certain market changes and boundary conditions. The emphasis given to the importance of the market mobility, while other scenarios are also simulated and discussed. The findings suggest that aggressive advertisement and low prices can be effective when the market composition is balanced. This study is especially interesting for e-tailers in a competitive market, where one or more competitors offer similar or identical products.