The online seller's optimal price and inventory policies under different payment schemes

We develop an analytical model to determine the seller's optimal price and inventory decisions under different e-commerce payment schemes. There are two types of payment schemes for consumers to choose from: pay-to-order, with payment occurring when an order is taken online; and pay-on-delivery, in which payment occurs after delivery of the product. Considering different consumer behaviours after consumers evaluate the products, we characterize the rational expectations equilibrium for the online seller. We obtain the optimal price and order quantity to maximise the online seller's profit under different payment schemes. We provide the conditions when it is feasible for online sellers to offer every payment scheme. Numerical examples are provided to illustrate the comparison of online seller's performance between the two payment schemes.