Dynamic Pricing Strategies Between Online and Off-Line Retailers Based on Switching Costs

1. Model Assumptions And Relative Concepts

Most discussions on switching costs in the field of marketing focus on micro-level, taking switching costs as a method to lock customers, preventing the loss of customers and maintaining customer relations. Scholars such as Liyin Jin found out in recent researches that switching costs not only raises the level of consumer satisfaction, but increasing switching costs better maintains consumer relations. It provides more well-rounded perspectives to the analysis of switching costs, as well as attracting more attention to the analysis of switching costs. This paper brings about switching costs among different retailers on the basis of conventional Hotelling model, discussing the differences in pricing strategy that retailers made on new consumers and regular consumers under the condition of dynamic pricing.

We assume that there is one unit long horizontal linearity market with consumers homogeneous distributing on it. Two competing retailers locate on the two ends of this market, relatively a and 1-b, selling homogeneous products. In this model, one retailer sell goods through the internet, the other choose the traditional access (offline). So the distance between the two shops is 1-a-b, a>0, b>0, 1-a-b>0 (see Figure 1).

Figure 1.

Hotelling model for online and offline retailers

Different consumers have different preference for online and offline access. Some of them prefer offline shopping. They hold that (1) offline purchase can provide the chance for them to see, feel and touch by themselves; (2) they do not have to wait for merchants to mail them the products; (3) they can avoid the releasing of important personal information, such as those relating to credit card code; (4) many consumers lack the ability to purchase online.

Others prefer shopping online. They argue that (1) it is freer to purchase online due to the unlimited working hours of online shops; (2) it is easier for them to find different products for comparison; (3) it will cut the transporting cost for offline purchase.

2. Solution

The utility functions for consumers buying products online and offline are:

Via (1) we have the location of critical consumers, i.e. the need of the two competitors:

Thus, the profit functions for the two retailers are as the follows: