Exploring the well-known competitor’s price effect on retailer’s discount promotion of digital goods

Nowadays, retailers often use discounts to promote and monetize their digital goods. Nonetheless, little research attention has been paid to the way discount strategies are designed in a competitive market. To fill this gap, we investigate well-known competitor’s price effect on retailers’ optimal discount decisions (in both discount size and duration). Inspired by our observation, we developed an analytical model including a less-known retailer and a well-known retailer with the less-known retailer offering a discount. Our analytical results show that retailer’s discount size increases with the intensity of price competition. Furthermore, different from prior findings, the less-known retailer prefers pairing a larger (smaller) discount size with a longer (shorter) discount duration under competition. In addition, our findings reflect that offering a longer promotion helps offset dominant competitor’s advantage. Using a unique dataset of audiobooks, we empirically test the derived hypotheses. Most of our predictions are consistent with empirical results. Our study provides retailers with useful managerial insights of discount promotion.