Competition between the Internet and Conventional Retailer: A Strategic Analysis of the Effect of Online Channel Efficiency

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1 ITERATIOA JOURA O ECOOMICS AD STATISTICS Compeiion beween he Inene an Convenional Reaile: A Saegic Analysis of he Effec of Online Channel Efficiency Hyung Rae Cho, Sung Moon Bae an Jong Hun Pak Absac This suy analyses he effec of he online channel efficiency in he conex of pice compeiion beween he Inene eaile an convenional eaile. Base on he cicula spaial make moel, i is foun ha he Inene eaile s channel efficiency plays a cucial ole in eemining he equilibium pice, make shae, an pofi. is, he convenional eaile pefes pice-leae posiion if he Inene eaile s efficiency is lowe han a ceain level, while pefes pice-followe posiion if he Inene eaile s efficiency is highe han he level. On he ohe han, he Inene eaile pefes pice-followe posiion egaless of he level of is efficiency. Secon, even if he Inene eaile s efficiency becomes exemely high, i is sill possible fo convenional eailes o ge a ceain level of make shae an a posiive pice coveing he cos of goos sol. Howeve, he Inene eaile can be hown ou fom he make if is efficiency becomes vey low. Thi, couneinuiively, he Inene eaile can make less pofi by impoving is efficiency gaually when is efficiency belongs o a ceain ineval. Keywos cicula spaial make moel, convenional eaile, Inene eaile, ash equilibium, Sackelbeg equilibium I. ITRODUCTIO Makeing on he Inene, a vey acive aea of eleconic commece [4][11], is emeging as a poweful communicaion an isibuion meium. Alhough makees all ove he wol agee ha he Inene will have a majo impac on he way moen companies opeae managemen an makeing aciviies [9], he convenional eaile will sill emain as an enuing ealiy [3]. Even wih he pesence of Inene eaile capable of poviing eleconic sevice fo consumes o choose a esie pouc wih jus a simple mouse click, he opion of puchasing fom neaby convenional eailes such as an oule o a soe will coninue o be available o consumes [3]. In his ega, compeiion beween he Inene eaile an he convenional eaile will become inense as eleconic commece pogesses. Hyung Rae Cho is wih he Depamen of Inusial Engineeing, Engineeing Reseach Insiue, Gyeongsang aional Univesiy, Koea. ( hcho@gnu.ac.k) Sung Moon Bae (Coesponing Auho) is wih he Depamen of Inusial & Sysems Engineeing, Engineeing Reseach Insiue, Gyeongsang aional Univesiy, Koea ( bsm@gnu.ac.k) Jong Hun Pak is wih he Depamen of Business Aminisaion, Caholic Univesiy of Daegu, Koea ( icelae@cu.ac.k) Suppose an Inene eaile specifies a new eleconic commece channel supplying poucs an pouc-elae infomaion o he consumes by simply using he Inene, an ha he convenional eaile enoes aiional eailing channels whee consumes can ouch an feel poucs an have a shopping amosphee. Then he eseach issue sill unexploe is how compeiion beween he Inene eaile an he convenional eaile can be concepualize igoously in ems of ash equilibium an Sackelbeg equilibium o inuce saegic makeing implicaions fo boh channels. Such eseach issue has clealy emaine unouche in lieaue how each channel shoul evelop an moify saegies egaing picing, make shae, an pofi accoing o he channel s level of efficiency. A goo analysis of his eseach issue can esul in he fomulaion of saegic makeing implicaions fo boh channels. Diffeen fom he convenional eaile, an Inene eaile nees no physical make pesence o aac cusomes. Rahe, i akes avanage of elepesence ha is usually chaaceize by easy Inene access, lack of physical locaion, an ineaciviy. Pesence, in his case, is efine as he subjecive expeience of being in a ceain place o envionmen even hough one is physically siuae in anohe [18]. Ineaciviy efes o he exen of use paicipaion in moifying he fom an conen of a viual wol envionmen in eal ime [16]. An Inene eaile conucs business hough is pesence ha is fel in he meiae envionmen. In his sense, convenional wisom icaes ha an Inene eaile may have a capabiliy o evenually conol he make in ems of picing, make shae, an even pofi by inense pice compeiion wih convenional eailes. In aiion, Inene echnology coninues o apily evelop, hence he Inene eaile woul be able o exemely enhance is channel efficiency in he nea fuue such ha any aiional cos elae o buying on he Inene woul no occu. Howeve, whehe his concep is ue o jus a myh shoul be invesigae. This suy aesse he eseach issues aise above by fis poviing a heoeical famewok o concepualize he compeiion beween Inene eaile an convenional eaile, an hen eiving seveal makeing implicaions fom he famewok s applicaion o specific pice compeiion beween boh channels. A he same ime, his suy aemps o suppo fuue eleconic commece eseaches o hink abou moe ineesing paamees an moe ealisic siuaions beyon he cuen scope of his suy. Issue 3, Volume 1,

2 ITERATIOA JOURA O ECOOMICS AD STATISTICS The es of he pape is oganize as follows. Secion eviews elae woks. The basic compeiion moel use in his suy is inouce in secion 3. In secion 3, builing a ynamic picing saegy by aoping ash an Sackelbeg equilibium mehos is also iscusse. Base on he analyical esuls fom secion 3, insighful makeing implicaions fo he Inene eaile ae pesene in secion 4. In secion 5, channel efficiency conol saegy fo he sake of impoving managemen pefomance of Inene an convenional eailes ae escibe. This suy ens wih conclusions an suggesions fo fuhe eseach issues. II. REATED WORKS ieaue in makeing an eleconic commece ofen focuses on compeiion beween pue convenional eailes [8], eailes' picing behavio in oligopolisic make [17], an local cusomes choice of eailes [5]. Bynjolfsson an Smih [4] analyze picing behavio of Inene eailes an convenional eailes ealing wih books an CDs. Balasubamanian [3] aesse a saegic analysis of compeiion beween iec makees an convenional eailes. Ha an Dohey [7] also iscusse he eaile's aopion of Inene implicaions fo eail makeing. ynch an Aiely [10] showe how pice sensiiviy changes when seach cos iminishes in Inene makeing. Recenly, Aola e al. [] analyze pice levels of expeience goos sol in online envionmen, an Yoo e al. [14] numeically analyze he hybi channel sucue. Accoing o he classificaion of eleconic commece eseach [11], eleconic commece lieaue can be classifie ino fou caegoies: applicaions, echnological issues, suppo an implemenaion, an ohes. Alhough a gea eal of eseach ha been mae abou eleconic commece wih espec o hese caegoies, suies invesigaing compeiion beween he convenional eaile an he Inene eaile fom he makeing saegy pespecive ae ae, suggesing a nee fo fuhe eseach ha aesses his issue. This suy seeks o fill such nee. In aessing he above menione eseach nee, his suy was basically influence by he woks of Bynjolfsson an Smih [4] an Balasubamanian [3]. o wo caegoies of homogeneous poucs like books an CDs, Bynjolfsson an Smih empiically analyze pice compeiion beween Inene eailes an convenional eailes. The esuls of hei suy can be summaize as follows: (1) pices offee by Inene eailes wee lowe han pices given by convenional eailes; () Inene eailes ajuse pices moe ofen han convenional eailes, pesumably ue o lowe menu coss; an (3) pice ispesion is lowe in Inene eailes han in convenional eailes. Balasubamanian aesse a saegic analysis of compeiion beween iec makees an convenional eailes by using he game appoach. This suy iffes fom ha of Bynjolfsson an Smih [4], since a saegic analysis of pice compeiion beween Inene eaile an convenional eaile was eive accoing o he ash equilibium moel an he Sackelbeg equilibium moel. Anohe iffeence is ha he esuls of his suy enables makees an eseaches o peic how boh channels woul compee wih each ohe in he fuue. This suy also suggess which makeing saegies in ems of pice, make shae, an pofi each channel shoul ake o win he compeiion an benefi moe. Ohe iffeences of his suy fom ha of Balasbamanian[3] inclue: (1) he Inene eaile was consiee explicily as a compeiion pane fo he convenional eaile; () he Sackelbeg equilibium was incopoae o eemine suiable coniions fo playing as eihe a pice-leae o a pice-followe; an (3) he Inene eaile's channel efficiency was inouce as a conollable paamee o ajus pice, make shae, an pofi. Oveall, his eseach suggess many saegic poins eive fom he esuls, which wee no foun in he pevious suies. III. COMPETITIO MODE AD SOUTIO The cicula spaial make moel [3][11] was use as a basic meium fo analyzing compeiion. In he cicula spaial make moel (ig. 1), consumes ae isibue unifomly on a cicle of uni cicumfeence, an in he make each consume is puchasing a sanaize pouc in each peio. Consume eman is assume o be inelasic. In igue 1, we have convenional eailes enoe R, which ae locae a equal isances fom each ohe on he cicumfeence. When visiing a convenional eaile, consumes incu avel coss a a linea ae pe uni isance. The avel coss inclue he oppouniy cos of ime, he eal cos of avel, an he implici cos of inconvenience [3]. ig. 1. Cicula spaial make moel fo boh convenional eaile an Inene eaile Since he web can always be eleconically accessible fom anywhee, he exac locaion of Inene eailes oes no have o be efine. Howeve, fo he sake of convenience, he Inene eaile (enoe D) is assume o be locae a he cene of he cicle in igue 1. Consumes of he Inene eaile o no incu any avel coss o buy he pouc. Bu aiional cos µ is sill incue when buying on he Inene because consumes ae no able o ouch an feel he pouc o check is qualiy [1][15]. Asie fom his, a ceain amoun of elivey ime is necessay befoe he pouc can be use, a ceain level of compue lieacy is neee on he pa of he consumes, an hee is secuiy anxiey abou he Inene eailes an he Inene iself [6][13]. Issue 3, Volume 1,

3 ITERATIOA JOURA O ECOOMICS AD STATISTICS Base on he above moel we can eive he make shae an pofis of he convenional eaile an he Inene eaile as follows[1]. A consume locae a a isance x fom a eaile is iniffeen beween puchasing fom he eaile an D when p + x p + µ. Thus he make shae of each convenional eaile is confine o: p p + µ S x. (1) The convenional eaile ies o maximize he pofi: p p + µ ( p c). () Because hee ae convenional eailes in he make, he make shae of he Inene eaile becomes: ( p p + µ ) S 1. (3) The Inene eaile ies o maximize he pofi: + 1 p p µ. (4) ( p c) In equaions () an (4), c epesens cos of goos sol(cogs) pe uni pouc. o he convenional eailes, invenoy cos as well as soe managemen cos ae incue. The Inene eailes ae exempe fom hese coss bu insea have o pay he elivey coss. The COGS of he convenional eaile may iffe fom ha of he Inene eaile. In his pape, fo convenience, we assume COGSs of he wo channels ae he same. In he conex of picing game, each playe has his own eacion funcion wih which he plans o ajus pice accoingly. The usual fom of eacion funcion consies he compeio's pice as a significan componen. Theefoe, by efeing o he eacion funcion, a playe can eemine is own coune pice wih espec o he compeio's pice. e us consie eemining he convenional eaile's eacion funcion ha has he Inene eaile's pice as one of he componens. If he Inene eaile's (selling) pice is P, hen he convenional eaile will eemine his pofi-maximizing pice P, as shown in equaion (). Theefoe, he convenional eaile's pofi-maximizing eacion funcion is obaine by leing / p 0. The eacion funcion fo he convenional eaile is as follows. p + µ + c p (5) Similaly, he Inene eaile's pofi-maximizing eacion funcion is obaine by calculaing / p 0, yieling equaion 7. p µ + c p + (6) 4 In his pape we consie wo ypes of game, namely, ash an Sackelbeg games. In ash game, each playe coninuously eacs (i.e., changes is pice) o is compeio s coune pice. If his chain of eacion leas o sable pices fo he playes, he esuling pices ae calle a ash equilibium. The ash equilibium can be eive by solving he eacion funcions of he game playes simulaneously, whee he eacion funcion of a playe can be eive fom iffeeniaing is pofi funcion by is pice. In his sense, he ash game is someimes calle as simulaneous pice seing. Meanwhile, in he Sackelbeg game, a pice-leae (fis move) fis eemines is pice by using he counepa s (pice-followe s) eacion funcion, hen he pice-followe ses his pice base on he pice-leae s pice. In his sense, he Sackelbeg game is someimes calle as sequenial pice seing. Calculaion of he ash an Sackelbeg equilibia is no so complex, hus we show only he esuls in Table 1,,3. Table 1. ash Equilibium Pice Make Shae Pofi Inene eaile p µ c S Convenional eaile p µ c + + S µ 3 3 µ ( µ 9 ) 1 ( + µ 18 ) Table. Sackelbeg Equilibium (Case: Convenional eaile as pice-leae) Pice Make Shae Pofi Inene eaile µ 3 p c Convenional eaile µ p c S µ S µ (3 ) 3 µ ( + µ ) 16 Table 3. Sackelbeg Equilibium (Case: Inene eaile as pice-leae) Pice Make Shae Pofi Inene eaile p µ c + Convenional eaile p µ c S µ 1 + S µ ( ) 4 µ ( + µ ) 8 IV. ITERET RETAIER S MARKETIG STRATEGY This secion elaboaes on he Inene eaile's makeing saegy by pefoming sensiiviy analyses of equilibium soluions. The convenional eaile becomes efficien (o inefficien) as becomes small (o lage). Meanwhile, he Inene eaile becomes efficien (o inefficien) as µ becomes small (o lage), because µ enoes aiional cos incue in shopping on he Inene. I shoul be noe ha an µ ae semi-conollable because eailes can ajus hem accoing o he qualiy of sevices ha hey povie o cusomes. o insance, he convenional eaile can lowe by poviing shule o elivey sevices. ikewise, he Inene eaile can euce µ by inoucing he policy of ceifie pouc qualiy assuance, unconiional efun an goos eun, on-ime elivey, an paymen secuiy. Consieing he ininsic chaaceisics of an µ, i is easy o ienify ha µ is moe conollable in compaison wih. Hencefoh, une he assumpion ha he Issue 3, Volume 1,

4 ITERATIOA JOURA O ECOOMICS AD STATISTICS convenional eaile's channel efficiency is fixe a, we invesigae he sensiiviy of pofis of he convenional eaile an he Inene eaile accoing o µ. IV-1. Pice Sensiiviy Analysis Pice sensiiviy analysis is pefome wih espec o changes in µ, meaning ha he pupose is o see how many changes occu in he equilibium pice as well as in µ. ig. (a) epics he Inene eaile's equilibium pice sensiiviy wih espec o changes in µ, while ig. (b), he convenional eaile's pice sensiiviy. By analyzing ig., a subsiiay eseach goal, which is o invesigae how much sensiiviy each channel equilibium pice shows wih espec o changes in µ, is accomplishe. Befoe poceeing fuhe, i shoul be noe ha fom ig., he Sackelbeg equilibium pice is always geae han he ash equilibium pice egaless of channel. This chaaceisic emains consan no mae how many changes ae mae in µ. (a) Inene eaile's equilibium pice sensiiviy o µ (b) Convenional eaile's equilibium pice sensiiviy o µ ig.. Equilibium Pice Sensiiviy o µ The Inene eaile's equilibium pice sensiiviy (ig. (a)) shoul fis be checke. When µ < /, he Inene eaile's equilibium pice as pice-leae,, is geae han is P equilibium pice as pice-followe,. Howeve, when µ > /, he Inene eaile's equilibium pice as pice-followe, P, is geae han is equilibium pice as pice-leae, P. On he conay, egaless of changes in µ, he convenional eaile's equilibium pice as pice-leae,, is always highe han is equilibium pice as P P pice-followe, P (ig. (b)). Anohe ineesing fac can be obseve in ig. (a) if µ is mae o convege o / o 3 /. This means ha he Inene eaile's channel efficiency is egae sufficienly because aiional cos involve in he shopping on he Inene is incue. In ha case, he Inene eaile's equilibium pice conveges o almos zeo, even if he Inene eaile akes eihe Sackelbeg o ash equilibium picing saegy. Theefoe, he only viable opion fo he Inene eaile is o ake he 'almos-zeo-pice' policy when is channel efficiency becomes egae. In his case, pofi available fo he Inene eaile will also become almos zeo, inicaing ha he Inene eaile will evenually have o be hown ou fom he make. Howeve, wha will happen o he convenional eaile's equilibium pice when he Inene eaile's channel efficiency impoves exemely o µ appoaches 0? In his siuaion, he convenional eaile's equilibium pice sill conveges o a ceain posiive level (ig. (b)). IV-. Make Shae Sensiiviy Analysis ig. 3 shows how each channel's equilibium make shae changes in accoance wih µ. An answe o he quesion "Une which coniion can a maximum make shae be acquie?" can be easily eive. o example, accoing o ig. 3(a) an 3(b), make shae is maximize when each channel acs as a pice-followe available fom Sackelbeg equilibium picing saegy. This means ha ash equilibium picing is always infeio o Sackelbeg equilibium picing if he concen is o acquie a geae make shae. Theefoe, each eaile, egaless whehe Inene o convenional, shoul y o ake a pice-followe posiion in he make if he wans o have a geae make shae han his compeio. Wha will hen happen o he make shae if he eaile akes a pice-leae posiion? ig. 3 shows ha he make shae obainable by acing as a pice-leae is always ominae by ha which is obaine by a compeio execising ash equilibium picing saegy. Inegaing hese commens so fa leas o a enaive conclusion ha if boh he Inene eaile an he convenional eaile ae ying o impove hei own make shae since hey ae involve in he Sackelbeg equilibium picing compeiion, boh will pefe a pice-followe posiion as much as possible avoi a pice-leae posiion. Howeve, in his siuaion, compeiion will en up conveging o he ash equilibium soluions. Issue 3, Volume 1,

5 ITERATIOA JOURA O ECOOMICS AD STATISTICS his, an impoan fac ha can be ienifie is ha he convenional eaile can ge a ceain poion of make shae even if he echnological as well as he legal an business envionmen fo Inene shopping becomes so well-avance an well-oganize o he exen ha µ is almos no incuing o cusomes. Also, he convenional eaile can ge a ceain fixe level of make shae like 1 / when he Inene eaile's channel efficiency is so egae o such a level as µ / o 3 /. IV-3. Pofi Sensiiviy Analysis ig. 4 shows he sensiiviy of pofis of he convenional eaile an he Inene eaile wih espec o changes in µ. o he sake of convenience, we assume ha c 0, whee c epesens COGS pe uni pouc. (a) Inene eaile's equilibium make shae sensiiviy o µ (a) Inene eaile's pofi sensiiviy o µ (b) Convenional eaile's equilibium make shae sensiiviy o µ ig. 3. Equilibium make shae sensiiviy o µ Aiional ineesing facs foun in ig. 3 is he make shae ha each channel can ge as he Inene eaile's channel efficiency inceases o eceases o he exeme. o example, efeing o ig. 3(a), he Inene eaile's make shae appoaches almos zeo when is own channel efficiency is exemely egae (i.e., µ / o 3 / ). The Inene eaile can ge a fixe poion of make shae like 3 / 4, / 3,1/ when is channel efficiency impoves exemely o he exen ha µ 0. o example, 3 / 4 is fo a pice-followe, / 3 fo ash equilibium picing, an 1 / fo a pice-leae (ig. 3(a)). On he conay, ig. 3(b) shows ha he convenional eaile's make shae appoximaes o a ceain level even if he Inene eaile's channel efficiency is exemely upgae (i.e., µ 0 ). o example, 1 / is fo a pice-followe, 1 / 3 fo ash equilibium picing, an 1 / 4 fo a pice-leae. om (b) Convenional eaile's pofi sensiiviy o µ ig. 4. Pofi sensiiviy o µ The implicaions iecly eive fom ig. 4 can be summaize as follows. is, he Inene eaile can no make any pofi (i.e. can no suvive in he make) if he Inene Issue 3, Volume 1,

6 ITERATIOA JOURA O ECOOMICS AD STATISTICS eaile becomes exemely inefficien (ig. 4(a)). Meanwhile, he convenional eaile can mak a ceain level of pofi (i.e. can suvive in he make) even if he Inene eaile accomplishes an ieal level of channel efficiency (i.e., µ 0 ) (ig. 4(b)). Secon, when he efficiency of he Inene eaile is elaively low ( µ > / ), he Sackelbeg pofi by a pice-leae is geaes fo he convenional eaile (ig. 4(b)), while he Sackelbeg pofi by a pice-followe is geaes fo he Inene eaile(ig. 4(a)). This makes he convenional eaile be willing o ac as a pice-leae, while he Inene eaile as a pice-followe. Thus, when µ > /, he Sackelbeg equilibium (he convenional eaile as he pice-leae an he Inene eaile as he pice-followe) becomes he opimal saegy fo boh he convenional an he Inene eaile. Thi, when he efficiency of he Inene eaile is elaively high ( µ < / ), boh he Inene an convenional eaile pefe o play as a pice-followe. Howeve, if boh eailes compee seveely o secue ha posiion, i will lea o ash equilibium soluions afe all [1]. Bu he poblem is ha he pofi fom ash equilibium is always lowe han fom Sackelbeg equilibium (ig. ). In ohe wos, even if a playe ace as a pice-leae insea of a pice-followe une he same channel cos coniion ( µ < / ), is pofi is geae han ash equilibium. Theefoe, if wo playes know his fac befoehan, hey woul compomise halfway a some poin insea of compeing fo he pice-followe posiion a he isk of ening up wih a ash equilibium. V. CHAE EICIECY COTRO STRATEGY So fa, pice, make shae, an pofi sensiiviy analyses wee pefome wih espec o changes in channel cos µ, an in he pocess ienifying seveal unique an ineesing poins. One significan poin obaine fom he sensiiviy analyses is ha he Inene eaile's channel cos µ affecs each channel's picing saegy in a ecisive way. I is heefoe necessay o elaboae on he Inene eaile's channel efficiency conol saegy. Howeve, alhough he convenional eaile's channel cos was no focuse on in he sensiiviy analyses, i seems wohwhile o look ino he convenional eaile's channel efficiency conol saegy as well. Befoe poceeing fuhe, assume ha when µ < /, wo channels coninue o compee wih each ohe o become a pice-followe unil hei compeiion ens up ash equilibium soluions. e us sa wih convenional eaile's channel efficiency conol saegy. The convenional eaile can ceainly incease pofi when he Inene eaile's channel efficiency becomes low (i.e., µ ges lage). When µ > /, he convenional eaile is able o ecie alone o be he pice-leae. In aiion, if he convenional eaile can enhance is channel efficiency by successfully loweing, is pofi will impove much moe. In his ega, he convenional eaile will have a song inenion o lowe fo moe pofi. As is ofen he case, loweing oes no come cheaply, meaning ha a consieable invesmen is equie o euce ino a age level. Theefoe, such a saegy fo mainaining channel efficiency by loweing shoul be ouble-checke by paying a balance consieaion o he incue invesmen cos. Wih ega o he Inene eaile's channel efficiency conol saegy, a iffeen siuaion occus in his case as shown in ig. 5 which epics he maximum pofi which he Inene eaile can obain as µ changes. As menione peviously, he pofi by ash equilibium becomes maximize in ineval I an II, while he pofi by Sackelbeg equilibium, whee he Inene eaile plays a pice-followe, ges maximize in ineval III. A his poin, he Inene eaile can incease pofi by ajusing µ. is of all, suppose ha in ig. 5, "" is enoing a pofi compue fom ( / ) an a is efine as he value of µ saisfying ( ) a ( / ). Suppose ha he Inene eaile's channel efficiency µ is any value b saisfying a b /. In his case, he Inene eaile may have wo ways fo impoving pofi by conolling is channel cos µ. The fis is by having a lowe µ like he convenional eaile as menione befoe. Howeve, loweing µ also causes aiional cos fo he Inene eaile. I is geneally accepe ha maginal cos inceases as µ eceases. Theefoe, befoe making a final ecision o aop his way of inceasing pofi, i woul be bee fo he Inene eaile o compae pofi incemen wih cos incemen. The secon way of inceasing pofi is moe complicae o incease µ (o ecease channel efficiency level) conay o common sense. By efeing o ig. 5, c is efine as µ saisfying ( c) ( b). Then he secon way simply means inceasing µ fom b o any value enoe by an ineval / µ c, which is a egion on axis µ of ig. 5 wih a cosse line. By inceasing µ like his, he Inene eaile oes no only save cos incue by mainaining µ inenionally wihin a specifie low level, bu also inceases pofi because is picing saegy is change fom ash equilibium o a pice-followe saegy of Sackelbeg equilibium guaaneeing moe pofi. In aiion, he Inene eaile can expec moe pofi by mainaining µ vey close o /. The bol line in ig. 5 epesens a maximum pofi which he Inene eaile can obain by he loweing channel cos o µ / in case is channel cos belongs o a µ /. om he pevious iscussions so fa, i can be conclue ha he Inene eaile may make moe pofi an expec cos savings by inceasing µ (o sacificing channel efficiency) in a specific ineval. In ohe wos, fo he Inene eaile, loweing µ (o impoving channel efficiency) oes no always lea o pofi incease, which is no only couneinuiive bu shaply iffeen fom he convenional eaile. Issue 3, Volume 1,

7 ITERATIOA JOURA O ECOOMICS AD STATISTICS ig. 5. Inene eaile's maximum pofi accoing o µ VI. COCUDIG REMARKS Une he coniion ha boh he Inene eaile an he convenional eaile ae selling a homogeneous an inelasic pouc in he make, he opimum picing saegy fo boh channels is analyze as he Inene eaile's channel efficiency changes. Two ypical ypes of picing game moels such as ash an Sackelbeg equilibium wee use, an he implicaions eive fom he analysis ae as follows. Picing by Sackelbeg equilibium was foun o always oupefom picing by ash equilibium. An ineesing phenomenon iscovee in his suy is ha when he Inene eaile's channel efficiency is geae han a ceain level (o µ is lowe han a ceain poin), boh channels pefe pice-followe posiion. On he conay, when he Inene eaile's channel efficiency becomes egae une a ceain level (o µ is ising above a ceain level), he convenional eaile pefes o ake a pice-leae posiion while he Inene eaile, a pice-followe posiion. This phenomenon conaics convenional wisom such ha he fis move (o pice-leae) usually benefis moe in he pice compeiion. Even if he Inene eaile's channel efficiency impoves exemely (o µ eceases vey much), i is sill possible fo he convenional eaile o ge a make shae geae han a ceain level an se a pice coveing COGS. Theefoe, hee always exiss a make lef available fo he convenional eaile, inicaing ha he Inene eaile's make shae canno each 100% une any make cicumsances. Anohe ineesing noe fom his suy is ha he Inene eaile can benefi moe in ems of pofi by loweing is efficiency when is channel efficiency is mainaine wihin a ceain ineval. Meanwhile, he convenional eaile shoul always upgae is channel efficiency o incease pofi when aiional cos incue by poviing sevice o incease channel efficiency is negligible. By compaing his suy s esuls wih hose of Bynjolfsson an Smih[4], he following ineesing poins can be mae. is, as shown in ig., he Inene eaile's pice is cosse wih convenional eaile's pice, epening on he channel efficiency ha he Inene eaile affos o mainain. This means ha pice of he Inene eaile may be highe han he convenional eaile's pice if he Inene eaile's channel efficiency is high. Howeve, consieing Bynjolfsson an Smih s empiical esul (1), which says ha pices fo books an CDs sol on he Inene ae less han he ienical iems sol via convenional eaile, he cuen channel efficiency of he Inene eaile is no high enough o allow him o aise pice highe han he convenional eaile's pice. Secon, Bynjolfsson an Smih s empiical esuls () an (3), which says ha he Inene eaile changes pices in smalle incemens han oes he convenional eaile, an ha hee exiss consieable pice ispesion among Inene eailes, inicae ha he convenional eaile is sill acing as a pice-leae, whehe inenionally o no. The eason is ha he convenional eaile is no able o change is pose pice so easily, while he Inene eaile can moify is pice elaively easily afe consieing he convenional eaile's pose pice. Inegaing hese wo poins above, i can be conclue ha he Inene eaile's µ is geae han /. This means ha he Inene eaile's channel efficiency nees o be impove moe, causing µ o be lowe han /. Theefoe, he compeiion beween he Inene eaile an he convenional eaile is peice o go on as follows: If he Inene eaile gaually (no asically) ies o impove is channel efficiency an successfully peneaes ino he make ha he convenional eaile pesenly ominaes, an µ is sill geae han /, hen he convenional eaile, sensing a cisis may no en o ac as a pice-leae any longe. In his case, he convenional eaile will efe o he Inene eaile's pice an accoingly ajus is own pice moe ofen han now, ening up wih fiece pice compeiion beween he wo channels. Howeve, he Inene eaile will have o enue some pofi loss fo he ime being unil channel efficiency eaches he poin a as epice in igue 5. The only way fo he Inene eaile o avoi such pofi loss is o come up wih an innovaive business moel o echnology o lowe is channel cos µ below a (o upgae is channel efficiency level above ) in a elaively sho peio of ime. The suy is hope o pave he way fo poviing useful guielines fo ecision-making abou how o eemine opimum picing saegy as well as opimum channel efficiency conol saegy whee he Inene eaile an he convenional eaile ae compeing wih each ohe in ems of pice fo a single pouc in he make. A few eseach issues emain o be ackle in he fuue. is, he paamees of cicula spaial moel shoul be segmene o show he iffeence beween he Inene eaile an he convenional eaile moe clealy an ealisically. Secon, his suy shoul be exene such ha he consume's eman is affece by pice, an ha wo o moe Inene eailes exis in he make. REERECES [1] Asha,.H., Ahma,., Janom,. an Mohame, A., Online Issue 3, Volume 1,

8 ITERATIOA JOURA O ECOOMICS AD STATISTICS Tanspoaion Sevices Guieline fo Sevice Qualiy, WSEAS Tansacions on Business an Economics, Issue 5, Vol. 5, May 008, pp [] Aola, A.M. an Aua, I.R., Pice evels in Online-Enable Envionmen: A Game-Theoeic Analysis fo Expeience Poucs, Poceeings of he WSEAS Inenaional Confeence on aes Tens in Infomaion Technology, Vienna, Ausia, ovembe 10-1, 01, pp [3] Balasubamanian, S., Mail vesus Mail: a Saegic Analysis of compeiion beween Diec Makees an Convenional Reailes, Makeing Science, Vol.17, o.3, pp , [4] Bynjolfsson, E. an Smih, M. D., icionless Commece? A Compaison of Inene an Convenional Reailes, Managemen Science, Vol.46, o.4, pp , 000. [5] Clake, I. (000), Reail Powe, Compeiion an ocal Consume Choice in he UK Gocey, Euopean Jounal of Makeing, 34, [6] Ghani,.A. an Siek, Z.M., Pesonal Infomaion Pivacy Poecion in E-Commece, WSEAS Tansacions on Infomaion Science an Applicaions, Issue 3, Vol. 6, Mach 009, pp [7] Ha, C. an Dohey,. (000), Reaile Aopion of he Inene Implicaions fo Reail Makeing, Euopean Jounal of Makeing, 34, [8] Kas, A. (1995), Moe on Hoeling's Sabiliy in Compeiion, Inenaional Jounal of Inusial Oganizaion, 13, [9] al, R. an Savay, M., When an How Is he Inene ikely o Decease Pice Compeiion?, Makeing Science, Vol.18, o. 4, pp , [10] ynch, J. G. an Aiely, J. D. (000), Wine Online: Seach Coss an Compeiion on Pice, Qualiy an Disibuion, Makeing Science, 19(1), [11] gai, E.W.T. an Wa,.K.T., A ieaue Review an Classificaion of Eleconic Commece Reseach, Infomaion an Managemen, Vol.39, pp , 00. [1] Rasmusen, E. (1989), Games an Infomaion: An Inoucion o Game Theoy, Basil Blackwell, Inc. [13] Rusli, M.R., Che-Hussin, A.R. an Dahlan, H.M., Assessing Tus in E-Commece Websie base on Ranking of Tus Aibues, WSEAS Tansacions on Business an Economics, Issue, Vol. 7, Apil 010, pp [14] Saji, K.B., Convenience Buying an Reailing Effeciveness: The Ciical Dives, Poceeings of he n WSEAS Inenaional Confeence on Managemen, Makeing an inances, Hava, Massachuses, USA, Mach 4-6, 008, pp [15] Salop, S., Monopolisic Compeiion wih Ousie Goos, Bell Jounal of Economics, Vol.10, pp , [16] Seue, J., Defining viual ealiy: Dimensions eemining elepesence, Jounal of Communicaion, 4 (4), pp.73-79, 199. [17] Tabuchi, T. (1999), Picing Policy in Spaial Compeiion, Regional Science an Uban Economics, 9, [18] Wime, B. G., an Singe, M.J., Measuing Pesence in Viual Envionmens: A Pesence Quesionnaie, Pesence, 7 (3), 5-40, [19] Yoo, W.S. an ee, E., Inene Channel Eny : A Saegic Analysis of Mixe Channel Sucues, Makeing Science, Vol.30, o.1, pp.9-41, 011. Issue 3, Volume 1,