Using “last-minute” sales for vertical differentiation on the Internet

In Internet-based commerce, sellers often use multiple distribution channels for the sale of standard consumer goods. We study a model of second-degree price discrimination in which a monopolist sells to risk-averse buyers. The seller uses two channels that differ in their risk attributes. In one channel prices and qualities are fixed and availability is assured. In the second channel, the seller offers a joint distribution of prices and qualities and may not guarantee availability. We characterize optimal two-channel selling policies. We show that it can be optimal to offer multiple identical items in a random sale event. However, the seller cannot benefit by offering two distinct quality levels in a sale event that is held with probability smaller than one. We use the model to offer explanations for the observed behavior of online sellers and discuss implementation issues in recent e-commerce environments.