Product Choice Strategy for Online Retailers

Abstract

An important strategic issue for managers planning to set up online stores is the choice of product categories to retail. While the “right” product category would depend on a number of factors, here we focus on the following two factors: compatibility of the product with the online channel, and the competition between the traditional brick and mortar channel and the online channel. This is to acknowledge two well-known facts: Certain products are more suitable for selling through the Web than through other channels; and an online retailer competes with not only other online retailers, but also traditional brick and mortar retailers. To determine the right product category, we develop a game theoretical model that allows for competition between the retailers. We study both Stackelberg and Bertrand competition models, as these two models capture the essence of different types of competition on the Web. Based on our results, we propose that, under all types of competition, the optimal product is one that is only moderately compatible with the Internet.