Online Cashback Pricing: A New Affiliate Strategy for E-Business
Proceedings of the 34th International Conference on Information Systems (ICIS), May 2013
17 Pages Posted: 1 Nov 2014 Last revised: 2 Nov 2016
Date Written: May 3, 2013
Abstract
This paper examines the impact of the 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 implementation 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. Under some conditions both merchants have no incentive to move alone but prefer its rival to do so.
Keywords: cash back, online advertising, promotion, price discrimination, duopoly
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