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. (C) 2011 New York University. Published by Elsevier Inc. All rights reserved.