Start Date
12-16-2013
Description
This paper examines the impact of “cashback” mechanism on online merchants’ affiliate and pricing strategies. Through reimbursing a portion of the transactional amount to consumers in a form of cashback, merchants are able to practice second-degree price discrimination. We develop an analytical framework which explicitly considers the cost associated with the underlying promotional vehicle. We first identify the conditions under which affiliate strategy is profitable. Surprisingly, the promotional “low” price could be actually “high”, relative to the uniform price when cashback is absent. We also propose channel coordination as a remedy to mitigate market inefficiency caused by double marginalization. Finally, we extend our model to a duopoly setting and find that a merchant can benefit from its rival’s move into the cashback market. Interestingly, under certain conditions both merchants have no incentive to move alone but prefer its rival to do so.
Recommended Citation
Ho, Yi-Chun; Ho, Yi-Jen; and Tan, Yong, "Online Cashback Pricing: A New Affiliate Strategy for E-Business" (2013). ICIS 2013 Proceedings. 7.
https://aisel.aisnet.org/icis2013/proceedings/EBusiness/7
Online Cashback Pricing: A New Affiliate Strategy for E-Business
This paper examines the impact of “cashback” mechanism on online merchants’ affiliate and pricing strategies. Through reimbursing a portion of the transactional amount to consumers in a form of cashback, merchants are able to practice second-degree price discrimination. We develop an analytical framework which explicitly considers the cost associated with the underlying promotional vehicle. We first identify the conditions under which affiliate strategy is profitable. Surprisingly, the promotional “low” price could be actually “high”, relative to the uniform price when cashback is absent. We also propose channel coordination as a remedy to mitigate market inefficiency caused by double marginalization. Finally, we extend our model to a duopoly setting and find that a merchant can benefit from its rival’s move into the cashback market. Interestingly, under certain conditions both merchants have no incentive to move alone but prefer its rival to do so.