A game theoretic analysis of multichannel retail in the context of “showrooming”

Abstract

“Showrooming” as a market phenomenon in multichannel retailing has grown in importance over the last few years. Consumers nowadays use the brick-and-mortar store to research about a product before purchasing it online. This leads to the offline stores being converted into showrooms for the online retailers. Therefore, popular notion suggests that showrooming should benefit the online retailer. In this paper, our objective is to analyze multichannel retailing under showrooming and determine the veracity of the popularly held belief. We develop a series of game theoretic models that involve a traditional retailer and an online retailer under showrooming. We determine optimal pricing strategies for each player and also the sales effort expended by the traditional retailer based on the interplay of “power” dynamics, market potential and the impact of showrooming. Our results indicate that profit for the traditional as well as the online retailer decreases with rising levels of showrooming. Hence, high levels of showrooming are not beneficial from the perspective of the online retailer. Thus, contrary to popular intuition, lessening of showrooming benefits not only the traditional retailer but also the online retailer. Nevertheless, from the consumer's point of view showrooming is beneficial as it leads to overall reduction in retail prices. We also analyze the viability of a click-and-mortar model as a strategy of the traditional retailer to counter the threat of showrooming.