How should local Brick-and-Mortar retailers offer delivery service in a pandemic World? Self-building Vs. O2O platform

Abstract

The Covid-19 pandemic has dramatically changed consumer purchase behavior, and the “stay-at-home order” policy has altered the operations of brick-and-mortar (B&M) retail stores. These changes have induced local B&M retailers to start online retailing with home delivery as an added option. B&M retailers can choose to offer online retailing on their own (referred to as self-building mode) or via a third-party online-to-offline (O2O) platform (referred to as platform mode). This paper investigates how the interplay between capacity, pricing, and online retailing mode is affected by the absence/presence of the pandemic. We characterize the equilibrium between the B&M retailer and the O2O platform provider. We find that the impact of the “stay-at-home orders” on B&M retailers differs by the online retailing mode. Interestingly, we find that the “stay-at-home orders” does not necessarily lower the B&M retailer’s profit if they engage in online retailing. Under self-building mode, the stay-at-home order leaves the B&M retailer with just the online channel. We identify the threshold delivery cost above (below) which the B&M retailer’s profit is lower (higher) than before. Under the platform mode, the “stay-at-home order” alters the retailer’s sales channel from dual channel to single channel, which mitigates the competition between the retailer and the O2O platform. The retailer’s profit increases if it has sufficiently high capacity. Finally, we extend the model to examine the effect of a “reopening policy” with a government subsidy. We find that although the subsidy improves the B&M retailer’s profitability, it may hurt the consumer surplus under some conditions. We suggest that governments take the B&M retailer’s capacity and operations mode into account when designing subsidy policies.