Can in-store recommendations for online-substitutive products integrate online and offline channels?

Abstract

An increasing number of multichannel retailers have adopted an offline-to-online recommendation strategy (OORS) that provides information regarding products sold online to in-store shoppers via recommendation systems employing in-store technologies (e.g., in-store virtual shelves and smart fitting mirrors). We investigate the impact of an OORS on cross-channel integration for retailers mainly selling substitutable products via online and offline channels. Considering omnichannel shoppers (who strategically choose a channel for purchasing) and offline shoppers (who prefer to shop in store), pricing game models with and without an OORS are developed for a decentralized retailer operating offline and online channels as separate businesses. The results show that although an OORS enables the offline channel to cannibalize more omnichannel shoppers from the online channel, interestingly, it alleviates channel conflict, which is reflected in increased prices and shopping traffic in both online and offline channels, because an OORS drives more in-store customers who cannot find matched products to the online store than omnichannel shoppers who shift from online to offline. Thus, an OORS increases online and offline profits and creates a synergic effect for a retailer with a decentralized organization. Compared to multichannel centralization, an OORS can even generate a higher synergic effect, especially when the proportion of offline shoppers in the mixed market is high. Finally, an OORS always improves social welfare, but its impacts on consumer surplus vary. An OORS can be beneficial for customers in a centralized organization but detrimental in a decentralized organization.