Online intermediary as a channel for selling quality-differentiated services

Abstract

When deciding whether to utilize an online intermediary in addition to their own distribution channels, quality differentiated service providers face the trade-off between the benefit of extended reach and the threat of increased competition. Using an analytical framework, we analyze when and how service providers may utilize an online intermediary to their advantage in the presence of advance selling (i.e., selling a service at an early date for future consumption). In general, when an online intermediary is used, the competition effect dominates the reach effect and leads to a falling price trend. Interestingly, we find that the negative effect of increased competition on profits, due to intermediary usage, can be reversed by committing to self-imposed participation limits (i.e., selling only a predetermined amount of services through the online intermediary). This ensures that the service provider is better off selling through both its own site and the online intermediary, rather than selling exclusively using either channel.