Effects of online-to-offline spillovers on pricing and quality strategies of competing firms

Abstract

With the rapid development of online retail, many manufacturers selling through offline channels have also ventured into online selling. However, much literature indicates that these omnichannel sales, relative to single-channel sales, will lead to cross-channel spillovers, that is, the stimulation or cannibalization effect of online sales on offline sales. This paper studies the spillover effect on the price and quality decisions of competing manufacturers and how these manufacturers initially respond to the cross-channel spillovers by adjusting product strategies. In the model, an incumbent already sells product in online market and an entrant entering the market with its higher-quality product. Meanwhile, firms may have been selling through their respective offline channels. Results indicate that although the positive spillover of online sales stimulates offline sales, it strengthens online competition by reducing the equilibrium prices. Moreover, a spillover can enhance or reduce the entrant's quality level. Taking positive spillover for example, a firm prefers to enhance its product quality when its spillover is significantly smaller than its competitor's or when its spillover is slightly larger but its product quality improvement is limited. Moreover, we find that the entrant's (incumbent's) quality improvement can alleviate (strengthen) the effect of a spillover, which provides firms useful insights into managing spillovers.