Abstract: With the steady development of Hainan’s offshore duty-free retail sector, there has been a surge in businesses entering the duty-free retail market, leading to intensifying competition within the industry. Leading duty-free market retailers in Hainan have established membership point systems through which they award points to consumers based on their membership tiers. The first-mover advantage of incumbent duty-free retailers enables them to accumulate a certain proportion of high-level member consumers. They use multiple points rebates to attract high-level member consumers to make repeat purchases, thereby creating formidable market entry barriers for new entrants. A number of new entrants to the duty-free retail industry have begun to challenge this advantage of established retailers by offering competitive membership levels strategy, thereby facilitating their entry into the duty-free retail market. In practice, Global Premium Duty-Free Plaza (Haikou) does not interwork the membership level strategy of China Duty Free Group, while Hainan Tourism Duty Free interworks the membership level strategy of China Duty Free Group, allowing consumers to enjoy the same level of point benefits. After the implementation of the “interworking membership level” strategy by the new entrants, consumers with high-level memberships from the incumbent retailers to be upgraded to high-level memberships with the newcomers, and the consumers can receive multiple rebates on the points they earn when purchasing duty-free products from the newcomers. The implementation of the “interworking membership level” strategy by new entrant retailers breaks the incumbent retailers’ customer barrier advantage and brings new opportunities for new entrant retailers, but newcomers also face new challenges. For example, when providing this service to consumers, they need to go through a series of cumbersome processes to review consumer membership upgrade application information, such as verification, validation and registration, which increases the trouble costs of new entrants. In addition, newcomers must cover the cost of providing points promotions involved in this strategy for consumers. Our research questions focus specifically on the following questions: (1) What conditions prompt new entrants to offer “interworking membership level” service in the context of incumbent retailers’ customer barrier advantage? What factors or scenarios drive newcomers to adopt this strategy? (2) What are the implications of new entrant retailers offering “interworking membership level” service on product pricing and profitability for both retailers?
This paper considers the market consisting of two types of consumers, i.e., premium membership consumers and regular membership consumers, and develops a retail system consisting of an incumbent duty-free retailer and a new duty-free retailer to study the market conditions under which the new duty-free retailer adopts the “interworking membership level” strategy in the context of the incumbent duty-free retailer’s customer advantage. We analyze the impacts of the strategy on equilibrium prices, profits and consumer welfare. First, using consumer utility theory, we build game-theoretical models and obtain the optimal strategies under two different promotional strategies: the new duty-free retailer does not provide “interworking membership level” service (NI strategy); it provides “interworking membership level” service (OI strategy). Second, we explore the impacts of providing “interworking membership level” service on the two retailers by comparing the profits of the new duty-free retailers and the incumbent duty-free retailers before and after providing this service. Finally, we analyze the impact of the strategy on consumer surplus.
Firstly, the implementation of the “interworking membership level” strategy by the new entrant retailers improves the optimal pricing of both retailers to some extent, thus weakening price competition. Secondly, new entrant retailers do not consider offering the ‘interworking membership level’ strategy when consumer acceptance of the new entrant retailer is small or large; new entrant retailers choose to offer the ‘interworking membership level’ strategy to consumers only when consumer acceptance of the new entrant retailer is moderate and the hassle cost is small. However, it is always advantageous to the incumbent retailer for new entrant retailers to offer the ‘interworking membership level’ strategy, which well explains why in practice incumbent retailers have not objected to the implementation of this strategy by new entrant retailers. The implementation of the “interworking membership level” service by new retailers can achieve a win-win situation for both new entrant retailers and incumbent retailers. Thirdly, interestingly, when the proportion of high-ranking member consumers is small, the incumbent retailer’s retail price will increase as the proportion of high-ranking member consumers increases and aggregate demand increases, but profits will decrease. This is because the losses from the increased cost of points-based promotions and reduced demand from regular member consumers outweigh the profit growth from higher prices and increased demand from higher-tier member consumers, so retailers’ profits decrease despite higher retail prices and increased aggregate demand. Finally, the analysis of the numerical example shows that the provision of an interworking membership level service by new entrant retailers harms consumer surplus.

Key words: offshore duty-free, point promotion strategy, competitive equilibrium, pricing strategy

摘要： 为打破在位免税零售商的客户优势,部分新进入免税零售商为消费者提供与在位者的会员等级互通服务。基于此,本文运用博弈论探讨了新进入零售商的会员等级互通策略,以及该策略对在位零售商最优决策和消费者购买行为的影响。研究发现:首先,当新进入零售商提供会员等级互通服务后,两个零售商均提高价格。其次,新进入零售商仅在消费者对其接受程度适中且麻烦成本较小时向消费者提供该服务。然而,此举对在位零售商始终有利,合理解释了实践中在位零售商并没有对该策略采取应对措施的现象。有趣的是,若新进入零售商不提供该服务,当高等级会员比例较小时,在位零售商的价格和总需求随着高等级会员的增加而提升,利润反而下降。此外,数值分析表明,新进入零售商提供该策略损害了消费者剩余。最后,本文扩展了额外销售收益、双渠道模式和存在非会员消费者三种情形,研究发现前述主要结论依然成立。

关键词: 离岛免税, 积分促销策略, 竞争均衡, 定价策略