Physical Stores as Warehouses for Online Channels: Implications for Channel Choices Under Competition

Abstract

With the development of new technology and business innovation, firms are actively adjusting their channel choices. Some retailers operate a hybrid and special omnichannel structure referred to as New Retail promising to tightly integrate online and physical channels. In the meanwhile, some retailers such as Ross choose to only operate physical channels. In this paper, we provide insights into competing firms’ retail-channel choices among online channel, physical channel, and omnichannel under the New Retail model. We find that firms’ channel choices determine which channels compete directly with each other and hence the intensity of competition between firms. Firms’ channel choices also give rise to three other effects-market expansion, consumer segmentation, and intrafirm cannibalization. The tradeoff among these effects along with the nature and intensity of competition determine the equilibrium channel structure in the market.