New Retail: Implications for Channel Choices under Competition

Abstract

The Internet and online retailing has disrupted traditional brick-and-mortar retailing immensely. In recent years, a hybrid omnichannel structure referred to as “New Retail” that promises to take advantage of the positive aspects of online and physical channels has emerged within the industry, and some industry experts tout New Retail as the future of retailing. In this paper, we provide insights into competing firms' retail-channel choices among online channel, physical channel, and omnichannel. The online and physical channels could differ in terms of geographical market coverage, consumer shopping cost, and consumer valuation—an online channel can serve both city and remote (suburban) consumers whereas a physical channel may be able to serve only city consumers, and consumers have a lower shopping cost in the online channel than the physical channel but can have a higher valuation for either the physical or the online channel. We find that an equilibrium in which at least one firm operates the omnichannel emerges only when consumers have a higher valuation for the physical channel. Moreover, neither firm would operate only the online channel in this case. In contrast, when consumers have a higher valuation for the online channel than the physical channel, neither firm is likely to operate the omnichannel. The market and channel characteristics have nonuniform and counterintuitive impacts on firms' profits under different equilibria. For instance, neither increasing the differentiation between the channels within a firm nor increasing the differentiation between channels across firms necessarily benefits firms. Furthermore, an increase in the number of city consumers relative to the suburban consumers can hurt the firm that serves only city consumers. The tradeoffs among interfirm competition, market expansion, consumer segmentation, and intrafirm-cannibalization effects of firms' channel choices are the driving forces that lead to our findings.