We investigate when two competing online retailers can be better off by adopting a referral service. When they adopt the referral service, a referral-offering online retailer trades off the additional revenue of referral fees against a risk of exposin...
We investigate when two competing online retailers can be better off by adopting a referral service. When they adopt the referral service, a referral-offering online retailer trades off the additional revenue of referral fees against a risk of exposing its loyal consumers to the price of its referred online retailer. The latter can sell its good to some loyal consumers of the former for a referral fee, and needs to determine its own price and its referred price. We first show that for the mixed-strategy equilibrium with the referral service to be sustainable, the referred online retailer should be required not to sell its good cheaper on its own site. Under this pricing restriction policy, we show that the proportion of the strongly loyal consumers of the referral-offering retailer in the group of its all consumers mainly determines the chance that the referral service will be adopted. As a result, when the market shares of both the retailers are not significantly different, the referral service should be adopted unless the degree of the loyalty among their loyal consumers is weak. When there are little comparison consumers, the referral service should not be adopted.