Operational strategies for IoT-enabled Brick-and-Mortar retailers in a competitive market

Abstract

Internet of Things (IoT) technology has been widely implemented in the retail industry to achieve sustainable operations; meanwhile, a number of operational concerns such as privacy and security have been exposed in practice. Therefore, more systematic theoretical analysis necessitates being performed in related fields. This paper explores how brick-and-mortar retailers can apply IoT technology to contend with online retailers and attract sustainable development. We first develop the pricing models for the online retailer and the brick-and-mortar retailer, respectively, by considering consumer hassle costs of purchasing in different retail channels and the impact of IoT technology. Further, we examine the benefits of IoT technology to the brick-and-mortar retailer and consumer surplus by comparing different cases. Afterward, to validate the robustness of analytical results from the basic models, we extend them to consider consumer risk aversion toward IoT technology and the price competition. Numerical analyses based on real data are also carried out. This study uncovers surprising findings and derives significant managerial insights. For example, we observe an opportunity that the IoT-enabled brick-and-mortar (IoT-B&M) retailer can regain lost market share from the competitive online retailers. Nevertheless, a higher level of personalized service supported by IoT is not necessarily beneficial to IoT-B&M retailers, which is contrary to our intuitions. Another counter-intuitive is that IoT-B&M retailers are unnecessary to improve service quality in the price competition, and they become challenging to profit when consumers are risk-averse.