A Hybrid Firm's Pricing Strategy in Electronic Commerce Under Channel Migration

Abstract

Achieving an effective business design across the Internet and the off-line channel is a critical concern for a hybrid firm's choice of pricing strategy. Two pricing models are proposed to examine how consumer channel migration (one-way channel interaction from the traditional sales channel to the Internet) affects pricing strategy. One model has no interaction between the Internet and off-line channels. The other includes the possibility of one-way migration to the Internet channel and incorporates consumers' channel-switching costs and loyalty to the firm. The two models offer interesting results for understanding traditional and Internet-based selling. A high level of channel migration leads a firm to manage the two channels as one. With low channel migration, in contrast, the firm should optimize and manage each channel separately. The models had two main findings: (1) the level of channel migration determines a hybrid firm's pricing strategy; (2) a hybrid firm's price-level choice should be determined by the on-line demand proportion of its business. The modeling results were validated with empirical analysis for 10 large South Korean e-commerce firms by comparing prices in different product categories for various types of hybrid firms and Internet-only firms. This research offers new marketing strategy insights for managers of hybrid firms who wish to optimize price-setting decisions based on interactions between distribution channels and the intensity of the firm's involvement in the on-line channel.