Strategic Manufacturers in Online Cash-Back Shopping

Chen Chen () and Yongrui Duan
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Chen Chen: School of Economics and Management, Tongji University, No 1239 Siping Road, Yangpu District, Shanghai, 200092, P. R. China
Yongrui Duan: School of Economics and Management, Tongji University, No 1239 Siping Road, Yangpu District, Shanghai, 200092, P. R. China

Asia-Pacific Journal of Operational Research (APJOR), 2021, vol. 38, issue 06, 1-37

Abstract: Cash-back industry is now witnessing surging development. Prior works on cash-back sites focus mainly on the demand side, while we are also interested in the supply side. We develop a game theoretical model with a manufacturer, an online retailer, cash-back site(s), and heterogeneous consumers. We find that when the cash-back channel cannot attract new consumers, the manufacturer raises the wholesale price and the retailer raises the retail price, which may lead to the cash-back paradox where all consumers face higher prices. Therefore, when there exists a cash-back channel, the manufacturer is always worse off and the retailer is better off when low-type consumers’ product valuation is intermediate, and consumer surplus and social welfare are both lower. When the retailer affiliates with two competing cash-back sites, the manufacturer contributes to the mitigation of double marginalization problem by raising the wholesale price to a lesser extent, which drives the surprising result that when there exists downstream competition, cash-back sites enjoy higher commission rate and under some circumstances, offer lower cash-back rate and enjoy higher profit. We also show that only when the cash-back channel makes the size of the low-type segment double will the manufacturer be better off with this channel.

Keywords: Cash-back channel; online shopping; market segmentation; double marginalization; price discriminative effect; promotive effect (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S0217595921500056

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