Nav: Home

Gaining an edge in head-to-head competition

February 10, 2017

Pairs of dominant retailers in direct competition - Macy's and Gimbel's, Saks and Bloomingdale's, Dick's and Sports Authority - are always trying to find an edge over their rival. Money back guarantees, or MBGs, and personalized pricing strategy, or PPS, work well for monopoly retailers. But how do they affect duopolies?

In "Compete in Price or Service? - A Study of Personalized Pricing and Money Back Guarantees," to be published in the March issue of the Journal of Retailing, Professor Bintong Chen, of the Southwestern University of Finance and Economics in Chengdu and the Lerner College of Business and Economics at University of Delaware, and Professor Jing Chen of the Rowe School of Business at Canada's Dalhousie University, employed game theory to investigate how price, profit, and customer welfare fared when retailers compete.

The authors established a model of competing retailers who are vertically differentiated in their ability to present the product and serve their customers - one is higher-quality. The results have practical implications on the sustainability of adopting MBG and/or PPS. As information technology improves, PPS is becoming feasible and more attractive to retailers. The results imply that only early adopters benefit from switching to PPS. As more retailers follow suit, the price competition intensifies and they may all end up losing profit. MBG, on the other hand, seems to be a better strategy for competing retailers; when both retailers switch from no customer returns to MBG, at least one of them and perhaps both will profit from the switch. Furthermore, since MBG is a dominant strategy under competition, all retailers are forced to switch from no returns to MBGs, whether they benefit or not, as long as their net salvage values are positive. "This incidentally provides another convincing explanation of the popularity of the MBG customer returns policy," the authors point out.

The results also reveal how each retailer responds and reacts to the other retailer's adoption of PPS or MBG. A retailer decreases its price when adopting PPS and increases its price when adopting MBG, and cuts its price when its competitor adopts either PPS or MBG. "This is because when either retailer switches from uniform pricing to PPS, it will cut its own average price and force the competitor to cut its (average) price at the same time," the authors write. MBG, as a service strategy, increases the customer's perceived value of the product, which motivates the retailer to increase the price. The improved service, however, puts pressure on the competitor and forces a price reduction. Consequently, PPS intensifies, and MBG mitigates, the price competition, and PPS reduces the likelihood that both retailers will benefit from offering MBGs.
-end-


Journal of Retailing at New York University

Related Competition Articles:

Aging and nutrients competition determine changes in microbiota
Two studies with surprising discoveries: in the elderly, the bacterium E. coli evolves in a way that can become potentially pathogenic and increase the risk of disease and, according to data obtained in another study, the metabolism of the same bacterium present in the microbiota evolves differently if it is alone or accompanied by other bacteria.
Is human cooperativity an outcome of competition between cultural groups?
A study by ASU researchers looks at how culture may have fueled our capacity to cooperate with strangers.
Location and competition
Those of us who drive regularly are keenly aware of gas prices and their daily fluctuations.
Political competition is hurting our charitable giving
As the midterm election heats up and the fallout of the Supreme Court nomination rings across the political divide, a new study presents a unique angle of American politics: how party affiliation affects charitable donations.
For wineries, competition boosts profits from sustainability
An international study of small- to medium-sized wineries and vineyards finds that the more sustainability practices a winery has in place, the better its financial performance -- and the effect is enhanced when a winery perceives significant pressure from competitors.
Outside competition breeds more trust among coworkers: Study
Working in a competitive industry fosters a greater level of trust amongst workers, finds a new study from the University of British Columbia, Princeton University and Aix-Marseille University, published today in Science: Advances.
Step aside Superman, steel is no competition for this new material
When it comes to materials, there is no question as to who wins the strongman competition.
Competition between males improves resilience against climate change
Animal species with males who compete intensively for mates might be more resilient to the effects of climate change, according to research by Queen Mary University of London.
International competition benchmarks metagenomics software
Communities of bacteria live everywhere: inside our bodies, on our bodies and all around us.
Can aromatherapy calm competition horses?
Although studies suggest that inhaling certain scents may reduce stress in humans, aromatherapy is relatively unexplored in veterinary medicine.
More Competition News and Competition Current Events

Trending Science News

Current Coronavirus (COVID-19) News

Top Science Podcasts

We have hand picked the top science podcasts of 2020.
Now Playing: TED Radio Hour

Listen Again: Reinvention
Change is hard, but it's also an opportunity to discover and reimagine what you thought you knew. From our economy, to music, to even ourselves–this hour TED speakers explore the power of reinvention. Guests include OK Go lead singer Damian Kulash Jr., former college gymnastics coach Valorie Kondos Field, Stockton Mayor Michael Tubbs, and entrepreneur Nick Hanauer.
Now Playing: Science for the People

#562 Superbug to Bedside
By now we're all good and scared about antibiotic resistance, one of the many things coming to get us all. But there's good news, sort of. News antibiotics are coming out! How do they get tested? What does that kind of a trial look like and how does it happen? Host Bethany Brookeshire talks with Matt McCarthy, author of "Superbugs: The Race to Stop an Epidemic", about the ins and outs of testing a new antibiotic in the hospital.
Now Playing: Radiolab

Dispatch 6: Strange Times
Covid has disrupted the most basic routines of our days and nights. But in the middle of a conversation about how to fight the virus, we find a place impervious to the stalled plans and frenetic demands of the outside world. It's a very different kind of front line, where urgent work means moving slow, and time is marked out in tiny pre-planned steps. Then, on a walk through the woods, we consider how the tempo of our lives affects our minds and discover how the beats of biology shape our bodies. This episode was produced with help from Molly Webster and Tracie Hunte. Support Radiolab today at Radiolab.org/donate.