Note on Self-Restraint as an Online Entry-Deterrence Strategy
Yunchuan Liu, Sunil Gupta, Z. John Zhang
Management Science · 2006 · Volume 52 · Issue 11
Abstract
We develop a game-theoretical model to show that in the markets where price consistency across channels is critical, an incumbent brick-and-mortar retailer can deter the online entry of a pure-play e-tailer by strategically refraining from entering online. In the markets where price consistency is not a constraint, we find that the incumbent can deter the e-tailer’s entry only if it enters online and credibly operates the online channel as an independent profit center. In other words, the incumbent must be willing to cannibalize its own brick-and-mortar business by charging a low online price. We also discuss some social welfare implications of retail online entry and the managerial insights of our analysis.
Keywords
multichannel retailer, channel management, pricing, market entry, game theory
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