The role of membership fees in online retail market competition

In the rapidly growing yet fiercely competitive online retail industry, the prevailing trend of adopting a paid membership system appears to be contradictory to the commonly observed principles of free and subsidized services over the Internet. Thus, this study proposes a competition model based on the assumption of heterogeneity in consumers’ online shopping search costs, in order to elucidate the underlying mechanism of this phenomenon. The findings reveal that e-commerce platforms that implement a paid membership system are best equipped to navigate marketing campaigns. Meanwhile, as long as a certain degree of promotional and discounted activities are present in the online market, retailers seeking profit maximization will find this system to be most effective for generating profits that surpass the market level. Furthermore, the comparative static analysis and numerical simulations in this study offer valuable insights to managers in their decision-making regarding membership fees and retail pricing.