Tailoring Technology for Heterogeneous Shoppers : Implications for e-Retail Channel Competition

With a rising influx of diverse shoppers into e-marketplaces, e-retailers often provide tailor-made information to meet the shoppers’ needs and increase their willingness to pay. We investigate the impact of shopper heterogeneity in their expertise on the profits of competing e-retailers with different levels of tailoring technology under different contracts. We provide implications for e-retailers’ targeting strategies for tailoring, results of which vary across the shopper expertise and their contracts with the supplier (seller hereafter). We build a game-theoretic model in which a merchant sells a product via two competing e-retail channels with different tailoring capabilities. The e-retailers either set retail prices (a sell-to contract) or delegate the decision to the merchant (a sell-on contract). Shoppers are of two kinds in their e-shopping experiences with the e-retailers: experienced (H-type) and inexperienced (L-type). We analyze which types of shoppers are more profitable for the seller and e-retailers, and how the results swing if tailoring is effectively targeted only on the experienced. We find that both e-retailers may prefer to sell to H-type only under the sell-to contract while the seller always prefers L-type. Under the sell-on contract, however, e-retailers’ preferences are different from each other, and the seller’s preference is always aligned with the better tailoring e-retailer only. To our surprise, L-type is always more influential to the profits of all participants than H-type. Interestingly, when tailored offers are effective only for H-type, however, the preferences of all participants can switch. This switch is more evident under the sell-on contract where two e-retailers never show common preferences. Under the sell-to contract, the preference can also switch as the tailoring difference increases. The preference gap between contracts tends to vanish as tailoring difference becomes significant. Our findings show the significant influence of L-type, neglected in practice, on firms’ profitability in an online channel. As the reach of tailoring to L-type can flip over the results for all participants, it is important to carefully monitor the effectiveness of tailored offers and the target recipients