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.

Graphical abstractFigure optionsDownload full-size imageDownload as PowerPoint slideHighlights► 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.