Many firms in the business-to-consumer market sell identical products online using auctions and posted prices at the same time. In this paper, we develop and analyze a model of the key trade-offs sellers face in such a dual-channel setting built around the optimal choice of three design parameters: the posted price, the auction lot size, and the auction duration. Our results show how a monopolist seller can increase his revenues by offering auctions and a fixed price concurrently, and we identify when either a posted price only or a dual-channel strategy is optimal for the seller. We model consumer choice of channels, and thus market segmentation, and find a unique (symmetric) auction-participation equilibrium exists in which consumers who value the item for more than its posted price use a threshold policy to choose between the two channels. The threshold defines an upper bound on the remaining time of the auction. We explain how optimizing the design parameters enables the seller to segment the market so that the two channels reinforce each other and cannibalization is mitigated. Our findings also demonstrate that there are two dominant auction design strategies in this setting: one-unit auctions that tend to be short and long multiunit auctions. The optimal strategy for the seller depends on the consumer arrival rate and the disutility of delivery delay incurred by high-valuation consumers. In either case, the optimal design of the dual channel can significantly outperform a single posted-price channel. We show even greater benefits over a naive approach to managing the two channels that optimizes each independently. Our results suggest that unless firms jointly manage these online channels, they may find that adding auctions actually reduces their revenues.marketing, e-commerce, online auctions
A growing number of firms are strategically utilizing information technology and the Internet to provide online services to consumers who buy their products. Online services differ from traditional services because they often promote interactivity among users and exhibit positive network effects. While the service increases the value obtained by consumers, network effects are known to intensify price competition and thus may reduce firms' profits. In this paper, we model the competition between two firms that sell a differentiated product when each firm can offer a complementary online service to its customers. We derive the market equilibrium and determine how firms should adjust their strategies to account for network effects. We find that when the service exhibits network effects, a firm's decision whether or not to offer the service depends on both the competitor's decision and the competitor's service quality. When the service does not exhibit network effects, this is not the case. In addition, we show that a firm can benefit from the technological ability to offer the service, and from an increase in the strength of network effects or in the market size of the service, only when the value customers derive from the direct functionalities (those that do not rely on the network) of the service are sufficiently high. As a result, a firm's investment in the direct functionalities of its service increases with the strength of network effects of the service as long as the marginal development cost is not too high. Finally, we show that inefficiencies in terms of the number of firms offering the service as well as the total number of service users may prevail.
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