Coordinated Management Can Boost Dual-Channel Online Sales Revenues
Firms offering similar items simultaneously online using both auctions and posted prices can increase their revenues significantly by jointly managing the dual channels.
ANN ARBOR, Mich.—Firms that sell nearly identical items simultaneously online using auction venues (such as eBay) and company Web sites with posted prices face certain tradeoffs. Attracting more customers to auctions where goods often sell for less, for example, may reduce the number of deep-pocket buyers who are willing to purchase the same items at higher fixed prices.
However, a new Stephen M. Ross School study suggests that firms can increase their total revenues by jointly managing the two online channels. Companies that fail to coordinate the operations of their "dual channel" offerings, though, may find that online auctions actually lower their revenues, says Hila Etzion, assistant professor of business information technology at the University of Michigan's Ross School of Business.
"Balancing the need to avoid cannibalizing the posted-price channel with the opportunity to exploit the potential of the auction channel may seem daunting to a manager," Etzion said. "However, our results confirm that a seller's revenue from the dual-channel setting can be higher than the revenue generated by using only a posted price, or by managing the two channels independently."
In their forthcoming study in the journal Manufacturing and Service Operations Management, Etzion and co-authors Edieal Pinker and Abraham Seidmann of the University of Rochester account for the fact that consumers make choices between the two channels (auctions vs. posted prices) by trading off the discount they expect to receive from the auction and the delay they incur by participating in it. The expected discount is directly influenced by the quantity of items being auctioned and expectations about the number of other bidders competing for the goods.
The researchers develop a model that calculates the optimal choice of auction length and quantity of goods when identical items are sold for a posted price by the same outlet and consumers independently choose the channel from which to buy. They also determine the optimal posted price when identical items are auctioned and identify the conditions under which the dual channel outperforms the single (posted price only) channel.
The study suggests that firms can use these three key design elements—posted price, auction-lot size and auction duration—to segment high- and low-valuation consumers between their online-auction and posted-price channels in ways that increase sales revenues. This strategy enables the seller to utilize the auction to capture some low-valuation customers while minimizing the loss of posted-price purchasers.
"As long as the customer traffic is reasonably high, there are only two dominant strategies for managing the dual channel," Etzion said. "In both strategies, the posted price is set higher than when there is no parallel auction."
One strategy, the researchers suggest, is to offer successive relatively short one-unit auctions parallel to the posted price. The second strategy is to offer long multi-unit auctions. The choice of the optimal strategy depends upon the customer arrival rate and the cost of the delivery delay incurred by high-valuation consumers.
In either case, the optimal design of the dual channel can significantly outperform a single posted-price channel, boosting revenues from 2.4 percent to 10 percent. The authors show even greater benefits over a naïve approach to managing the two channels that optimizes each independently.
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