In-Store Referrals on the Internet

In the contemporary e-business, a retailer may display the links to the competing retailers directly (direct referral), or display the referral link provided by a third-party advertising agency (third-party referral), and these referrals may be either one-way or two-way. In this paper, we show that the referrals may align the retailers’ incentives and facilitate implicit collusion, and one-way referral may result in a mutually beneficial situation, thereby providing an economic rationale for these seemingly puzzling phenomena. Using third-party referrals may enhance the retailers’ collusion despite the potential disutility and revenue leakage, and referral services may be detrimental for the consumer welfare.

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► We study in-store referral, where a retailer may display links to its competitors.
► In-store referrals may align the retailers’ incentives and facilitate implicit collusion.
► One-way referral may result in a mutually beneficial situation.
► Third-party referrals may enhance the retailers’ collusion.
► Referral services may be detrimental for the consumer welfare.