Wholesale Pricing or Agency Pricing on Online Retail Platforms: The Effects of Customer Loyalty

Abstract

Traditionally, the online retailer has adopted the wholesale pricing model to work with heterogeneous manufacturers, that is, the retailer buys the products from the competitive manufacturers and then resells them to customers. Recently, the increasing prevalence of online retailing has given rise to a novel agency pricing model; that is, the manufacturers sell their products directly to customers on the retailer’s platform, and the retailer charges a commission fee for each sale. Meanwhile, customer loyalty is an important determinant of long-term business success for the retail platform. Considering the customer with loyalty, this paper investigates how the chosen pricing model (wholesale pricing model or agency pricing model) affects the online retailer’s profit, industry profit, consumer surplus, and social welfare. We find that the latter model always leads to a lower retail price and higher consumer surplus. More important, we also show that the industry profit and social welfare increase when the online retailer switches from the former model to the latter one. However, the online retailer’s profit critically depends on customer loyalty. Specifically, when customer loyalty is strong enough, the online retailer should adopt the agency pricing model. Otherwise, the wholesale pricing model dominates.