Proximity to a Traditional Physical Store: The Effects of Mitigating Online Disutility Costs

Abstract

We examine the implications of proximity to a physical store in offline-online retail competition where online dis-utility costs, which encompasses factors such as trust in the seller, returns, and after-sales support, are important. Building on classical models, we consider a traditional retailer’s expansion online, benefiting from the physical store’s presence in serving customers online. Our innovation is to allow online dis-utility costs to be mitigated if the purchase is from a dual-channel retailer, defining the mitigation as a function of proximity to the traditional store. Although expansion online is rarely profitable for traditional retailers, the expanded presence increases consumer welfare – which is further increased by competition from a pure e-tailer. However, the competition between a pure e-tailer and dual-channel retailers can lower social welfare: in aggregate consumers may incur greater online dis-utility costs than transportation costs to obtain lower prices online. When online dis-utility costs are high and no pure e-tailer is present, dual-channel retailer prices and profits, in traditional stores and online, are greater than those where the market only has physical stores and a pure e-tailer. Furthermore, consumer welfare is lower. Thus, consumers benefit from an expanded presence of traditional retailers on- line only when online dis-utility costs are low enough that mitigation matters. If online dis-utility costs are low, then their mitigation can result in higher social welfare in a market with only dual-channel retailers. Similarly, the mitigation of online dis-utility costs can result in higher social welfare when dual-channel retailers and a pure e-tailer coexist.