Discourage or encourage? An online manufacture’s response to competing product introduction under physical showroom cooperation

Abstract

More and more online manufacturers showcase products in retailers’ stores which are regarded as physical showrooms to resolve product fit uncertainty, and retailers provide retail service with private information. To satisfy consumers’ heterogeneous demands, retailers may introduce competing products. This paper focuses on an online manufacturer’s response to a retailer’s competing product introduction strategy under physical showroom cooperation. We find that the impacts of product competition on the online manufacturer’s and the retailer’s profits are inconsistent. When product competition harms the retailer but benefits the online manufacturer, the online manufacturer would encourage the retailer to introduce the competing product; otherwise, the online manufacturer would discourage the introduction of the competing product. Furthermore, the interaction between product competition with information asymmetry is investigated. The results show that although the online manufacturer always suffers loss from asymmetric information, the competing product introduction reduces its cost to identify the information under certain conditions.