Multi-Channel Price Differentiation:
An Empirical Investigation of Existence and Causes
1 Agnieszka Wolk, Ph.D. University of Frankfurt, School of Business and Economics,
Department of Marketing, Mertonstr. 17, 60054 Frankfurt am Main, Germany,
2 Christine Ebling, Ph.D. University of Technology Sydney, Sydney, Australia,
Multi-channel price differentiation:
an empirical investigation of existence and causes
Price differentiation has long been recognized as a strategy that companies can use to increase
profits when consumers’ tastes and valuations of a good differ. Operating multiple distribution
channels (e.g., offline and online stores) that have varying degrees of functionality and are
differently valued by consumers gives companies an opportunity to apply differential prices in
these different contexts. Nevertheless, existing empirical studies suggest that multi-channel
retailers charge uniform prices through their different distribution channels to preserve channel
consistency and avoid consumer irritation. In this paper, we study channel-based price
differentiation and empirically determine the extent of its occurrence among multi-channel
retailers. Additionally, we analyze factors that influence a company’s decision to engage in
channel-based price differentiation. The results show that multi-channel retailers recognize the
opportunity to increase their profits and increasingly engage in channel-based price
differentiation; this finding contradicts existing empirical studies on price dispersion. Consistent
with microeconomic theory, it seems that price differentiation mostly occurs among big
companies with market power that can separate markets.
Key words: price differentiation, multi-channel pricing
Research in marketing and economics has long acknowledged that price differentiation can be a
profitable pricing strategy (Phlips, 1989). In a market with heterogeneous tastes and different
product valuations, companies may increase their profits by segmenting consumers and charging
differential prices, which allows for the extraction of additional consumer surplus. Empirical
studies show that profit may increase by up to 34% when companies engage in price
differentiation over profits using a uniform pricing strategy (Khan & Jain, 2005). As a result,
researchers advocate using price differentiation whenever possible (Phlips, 1989). Among the
various forms of price differentiation that exist, self-selection price differentiation has received
special attention from researchers and practitioners due to its numerous advantages, which
include its low cost and the high ease of its application in addition to its high profitability (Khan
& Jain, 2005; Phlips, 1989). In the case of self-selection price differentiation, a company offers
multiple product versions at various prices and allows consumers to choose the one that best
suits their preferences (Mussa & Rosen, 1978).
Whereas various types of self-selection price differentiation have been widely used by
companies (e.g., versioning, coupons, different prices for damaged goods, intertemporal pricing),
technological developments constantly offer new applications that may help to increase profits.
The growing popularity of the Internet has led many conventional retailers to initiate online sales
and turn themselves into multi-channel retailers that offer their consumers the choice between
online and offline distribution channels (Zettelmeyer, 2000). As online and offline channels
differ in many respects, such as the level of convenience, risk or transparency (Chiang &
Dholakia, 2003), consumers develop heterogeneous channel preferences, leading to different
channel valuations and price sensitivities (Chu, Chintagunta, & Vilcassim, 2007; Degeratu,
Rangaswamy, & Wu, 2000; Kacen, Hess, & Chiang, 2003). As a result, operating multiple
distribution channels provides an opportunity to apply channel-based price differentiation, where
companies can charge different prices for the same product offered through an online and offline
channel and allow consumers to self-select their preferred channel-price combination.
Surprisingly, while theoretical work acknowledges the possibility of channel-based price
differentiation for multi-channel retailers (Dulleck & Kerschbamer, 2005; Dzienziol, Eberhardt,
Renz, & Schackmann, 2002; Zettelmeyer, 2000), recent empirical studies in the price dispersion
literature fail to find any evidence for its occurrence (e.g., Ancarani & Shankar, 2004; Pan,
Ratchford, & Shankar, 2002; Tang & Xing, 2001). Also, practitioners argue in favor of uniform
pricing in this context to prevent customer irritation (Asheraft, 2001). However, there is no
empirical study that explicitly analyzes the occurrence of channel-based price differentiation
among multi-channel retailers (Neslin et al., 2006). Therefore, in a first study, we analyze
whether multi-channel retailers charge different prices for the same product through online and
offline channels and ascertain the size of the price differences (i.e., price gaps).
The results of this first study clearly indicate that retailers engage in channel-based price
differentiation. However, this study also shows that not all multi-channel retailers equally engage
in channel-based price differentiation. Unfortunately, little research has focused on the question
of whether to price differentiate (Anderson & Dana, 2007). While this topic has received some
attention in the theoretical economic literature (e.g., Anderson & Dana, 2007), the empirical
research in this area is scarce, with only Iyer and Seetharaman (2001) having worked on the
question. As a result, we collected additional data and conducted a second study to analyze
factors that influence a company’s decision to engage in channel-based price differentiation,
specifically the influence of market-specific, retailer-specific, and product-specific factors on the
probability of observing channel-based price differentiation, its extent and direction.
The remainder of the paper is organized as follows. First, we review the existing literature on
price differentiation in distribution channels and multi-channel pricing. Next, we discuss the
conditions for successful channel-based price differentiation based on a microeconomic
rationale. In particular, we focus on the impact of market, product, and retailer characteristics on
the retailer’s decision whether to price discriminate. Thereafter, we describe the data as well as
its limitations with respect to the non-statistical sampling procedure and the factor
operationalization used. We present the results of the two empirical studies, discuss their
implications and conclude with directions for future research.
Various studies have considered price differentiation in the context of a distribution system.
Jeuland and Shugan (1983) propose the use of quantity discounts as a means to assure channel
cooperation in the context of a single manufacturer-retailer distribution channel, while McGuire
and Staelin (1983) propose two-part tariffs in these settings. Gerstner, Hees, and Holthausen
(1994) study price differentiation within a distribution channel when a manufacturer issues
coupons that can be used by the retailer as another means of channel coordination. The authors
show that such a pull strategy alleviates issues of double marginalization and channel
miscoordination. Besanko, Dubé, and Gupta (2003) analyze the manufacturer’s and retailer’s
ability to engage in price differentiation by issuing segment-specific coupons to consumers in the
context of a vertical channel.
While these studies focus on within-channel price differentiation strategies, Iyer (1998) develops
a theoretical model that analyzes a manufacturer selling through competing retailers using
contracts to induce price-service differentiation among retailers. Also, Cavero, Cebollada, and
Salas (1998) and Dulleck and Kerschbamer (2005) theoretically analyze the application of
different distribution channels to price differentiate along the quality of advice. Dzienziol et al.
(2002) go one step further and focus specifically on an online and offline distribution channel for
financial services; they recognize the opportunity for channel-based price differentiation in this
context. Similarly, Zettelmeyer (2000), who analyzes the pricing and communication strategies
of multi-channel retailers, accounts for the possibility of channel-based price differentiation in
his theoretical model.
Also, from a consumer perspective, channel-based price differentiation seems to be feasible
because price differences across online and offline channels could be easily justified by
differences in channel characteristics. Consumers derive different utility from various
distribution channels (Chu et al., 2007), which, in turn, leads to differences in channel valuations.
Kacen et al. (2003) show that the willingness to pay for a product purchased through an offline
channel can be 8% - 22% higher than the willingness to pay for a product purchased through an
online channel. Similarly, Jensen et al. (2003) find that consumers’ perceptions of prices differ
for online and offline channels.
Therefore, channel-based price differentiation is feasible, and this, together with the evidence
that price differentiation increases profits (Khan & Jain, 2003), should encourage companies to
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