Offering Memories to Sell Goods? Pricing and Welfare Implications of Experiential Retail

Abstract

Problem definition: In an environment where consumers’ rising valuation of Instagrammable memories drives their spending from products to experiences, retailers offer experiences to attract consumers back to their stores. Yet, it is not obvious under which settings consumers can benefit from these experiences and raise retailers’ profits. Methodology/results: We use a random utility model for consumer choice in both monopoly and duopoly settings. For the latter, we pose a game-theoretic model to analyze the equilibrium prices, profits, and consumer welfare for various problem cases. We show that medium-quality experiences can lower the product sales and store traffic below the level when no experience is offered. Sufficiently low- or high-quality experiences overcome this issue, making the consumers better off. Yet, the former presents the only profitable option when a single retailer in the market offers an experience. In contrast, when both retailers adopt experiences, low-quality experiences may not be profitable, and the retailers would need to adopt even higher-quality experiences, which lead to a “win-win-win” outcome for the two retailers and consumers. A fee structure for the experience elevates retailer profits but can turn stores into outlets where consumers visit to purchase experiences and not products. When experiential retailing is the common practice in the market, it enables “win-win-win” outcomes when free experiences fail. Managerial implications: Being the first to study this new retail format, our results contribute to the ongoing debate on the settings under which experiential offerings are beneficial for the retailers and consumers and highlight that there is no one-size-fits-all strategy. Our results show that experiences affect main product sales in nonobvious ways, especially in competitive markets. In a (post-)pandemic world where retailers try to attract consumers back to stores, we offer insights that can guide retailers in the process.Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2021.0339 .