Competitors or frenemies? Strategic investment between competing channels

Abstract

It is increasingly common for an online retailer to invest in a competitor offline retailer, or vice versa. In order to identify the conditions under which this type of cross-investment in a competitor is attractive, we develop a duopoly model with an e-tailer and a brick-and-mortar (BM) retailer, and ask when, or whether, one member of the duopoly should invest in the other. The impact of the investment decision on the duopoly’s leadership structure, prices, demands, and profits are investigated. Our study shows that the investor chooses to invest in the investee when the investee’s value is medium; the investment can weaken the price competition between the two channels, and lead to a win-win outcome. When there is no cross-channel investment, the member of the duopoly that is more efficient in selling the product should take the leadership role by setting the selling price first. When one member of the duopoly does decide to invest in the other, however, the leadership decision depends strongly on the relative initial values of the two retailers. Finally, we show that when the initial value of the investee as estimated by the investor is sufficiently low, and the customer’s degree of acceptance of the e-tailer’s channel is sufficiently high, the investor prefers to be an investment holder; otherwise, the investor prefers to receive a dividend.