Online cash-back shopping with network externalities

Abstract

Along with the popularity of online shopping, the cash-back industry is witnessing dramatic development. Under this backdrop, retailers who sell products with network externalities make different decisions about affiliating with cash-back sites. In this paper, we set up a cash-back model considering network externalities. Our goal is to identify the condition under which it is profitable for retailers whose products exhibit network externalities to affiliate with a cash-back site and to find out the driving force of the profitability. We find that only when there are more low-type consumers than high-type consumers and the degree of network externalities is lower than a certain threshold is it profitable for such a retailer to affiliate with an independent cash-back site, because the cash-back rate is decreasing in the intensity of network externality. It is the price discriminative effect instead of the promotive effect that makes it profitable. We show that the double-marginalization problem between the retailer and an independent cash-back site leads to the cash-back paradox where all consumers pay more for the product in the presence of a cash-back channel. We also show that when the retailer affiliates with two cash-back sites, each site has the incentive to lower the cash-back rate to take advantage of network externalities, which makes the cash-back paradox more likely to happen and makes it less likely for a retailer to benefit from cash-back channels. Furthermore, we suggest the retailer establish his own cash-back channel. Our work provides implications for retailers as well as for cash-back sites and consumers.

Keywords:

• Cash-back channel
• network externalities
• price discriminative effect
• promotive effect

Disclosure statement

There is no potential conflict of interest.

Notes

1 https://techcrunch.com/2014/09/09/rakuten-buys-ebates-for-1-billion/

2 https://www.statista.com/statistics/586583/ebates-operating-income-quarter/

3 https://store.nintendo.com/ng3/

4 For sake of brevity, we address the retailer as a ‘he’ and a consumer as a ‘she’.

5 This is the condition under which it is profitable for the retailer to serve both segments instead of serving only the high-type segments. This is a mild assumption in that $\frac{\sqrt{1-\theta }+\theta -1}{\theta }$ is decreasing in θ, and $0<\frac{\sqrt{1-\theta }+\theta -1}{\theta }<0.5.$ When the size of the low-type segment is close to 0, which indicates that this product is a mass product, then the valuation of this segment will not be very low and that the assumption requires $\delta >0.5$ in this case is not very restrictive.

6 https://www.microsoft.com/en-US/store/b/education.

Additional information

Funding

The authors gratefully acknowledge the support from the National Natural Science Foundation of China (71771179, 71532015, 71371139) and China Scholarship Council.