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Targeted pricing and channel management

Yunchuan Liu, 2003
Faculty Advisor: Z. John Zhang

Abstract

In my thesis, I study how distribution channel relationships have changed in an information intensive environment. First, as manufacturers and retailers build up their capability to gather and process detailed customer information, they acquire the unprecedented flexibility to charge different prices to different customers. Second, with the help of Internet, manufactures and retailers can open direct channels, in addition to the traditional distribution channel, to sell to consumers.

In this thesis, I develop models to capture firms' targeting ability and channel expansion decision by allowing firms to invest in targeting ability and open an online channel. This thesis will shed light on how firms' targeting ability and channel expansion affect firms' profitability, consumers, and social welfare.

In the first essay, manufacturers and retailers have the option to invest in targeting ability. If firms have targeting ability, they can charge customized prices to consumers. If firms do not have targeting ability, they can only charge a uniform price to all consumers. In this essay, a manufacturer also has the option to open a direct channel to sell directly to end consumers. Interestingly, retailers may actually suffer from obtaining targeting ability, even when targeting cost is not a problem. However, retailers may still strategically invest in targeting ability to deter a manufacturer's entry.

In the second essay, I study the optimal pricing and channel strategy for a brick-and-mortar retailer facing market entry of a pure play E-tailer. I allow the brick-and-mortar retailer to open an online store with either independent operation or joint operation. Surprisingly, I show if the incumbent brick-and-mortar retailer opens an online store with joint operation, market entry is more profitable for the E-tailer, compared to the case that the incumbent brick-and-mortar retailer does not open an online store. Therefore, the incumbent retailer should refrain from expanding business online to avoid an E-tailer entry.

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