How Does Free Riding on Customer Service Affect Competition?

Abstract

T he free-riding problem occurs if the presales activities needed to sell a product can be conducted separately from the actual sale of the product. Intuitively, free riding should hurt the retailer that provides that service, but the author shows analytically that free riding benefits not only the free-riding retailer, but also the retailer that provides the service when customers are heterogeneous in terms of their opportunity costs for shopping. The service-providing retailer has a postservice advantage, because customers who have resolved their matching uncertainty through sales service incur zero marginal shopping cost if they purchase from the service-providing retailer rather than the free-riding retailer. Moreover, allowing free riding gives the free rider less incentive to compete with the service provider on price, because many customers eventually will switch to it due to their own free riding. In turn, this induced soft strategic response enables the service provider to charge a higher price and enjoy the strictly positive profit that otherwise would have been wiped away by head-to-head price competition. Therefore, allowing free riding can be regarded as a necessary mechanism that prevents an aggressive response from another retailer and reduces the intensity of price competition.

Measuring the Effects of Online-To-Offline Marketing

“…We then used a multinomial logit model to examine the relationships among the channel adoption factors, search channels, and purchase channels. In the offline channel, the results regarding media richness, tangibility, sales service quality, and online purchase risk supported our theoretical derivation (Jiang & Balasubramanian, 2014;Maity & Dass, 2014;Shin, 2007). Hence, O2O retailers must enhance sales of their products intelligently, enable e-consumers to access detailed product information, and improve services (e.g., quick return of goods) in the offline channel.…”

“…Thus, we propose the following hypothesis: H3: Consumers who care about search enjoyment are more likely to search for goods through an offline channel. Shin (2007) indicates that consumers who did not purchase goods through an online channel behave in such a way because they cannot assess the actual quality of products while purchasing, remaining uncertain about the goods. Consumers tend to examine physical products at stores to reduce uncertainty (Jiang & Balasubramanian, 2014).…”

New Product Design under Channel Acceptance: Brick‐and‐Mortar, Online‐Exclusive, or Brick‐and‐Click

“…In line with Chiang et al. (), Shin (), Bernstein et al. (), and Wankhade and Dabade (), we conceptualize the disutility of online purchases as a probability of product mismatch due to consumer's inability to touch and feel the new product.…”

Pareto Improvement Strategy for Service-Based Free-Riding in a Dual-Channel Supply Chain

“…Using a consumer utility model, they analyzed channel differentiation caused by the free-riding in a dual-channel supply chain, and put forward measures that could effectively avoid the negative effect of free-riding qualitatively. Shin (2007) considered free-riding behavior between two traditional retailers. He thought that free-riding might be a way of moderating price competition, and proved that the retailer providing information service benefited from free-riding, too.…”