Dynamic incentive mechanism for services of the traditional retailer in the presence of the E-commerce retailer

This paper examines the dynamic incentive mechanism for the traditional retailer in the presence of the E-commerce retailer when customers free ride. Customers' free riding will undercut traditional retailers' incentives to provide services. Customers' free riding in this paper means that the customer uses services of the traditional retailer, but purchases the merchandise at the E-commerce retailer. We take a differential game approach to study the dynamic interaction between the traditional retailer and the E-commerce retailer. In the first place, we find the conditions under which retailers may be better off under cooperative rather than under non-cooperative play. Furthermore, we identify the conditions under which the traditional retailer providing services does benefit from customers' free riding and he may invest more to facilitate free riding. And then we design an incentive mechanism to make the traditional retailer act in accordance with cooperation so as to facilitate free riding. Credibility of incentive equilibrium is analyzed. We also point out some methods to deal with free riding finally.