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 disutility 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, benefitting from the physical store's presence in serving customers online. Our innovation is to allow online disutility 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 disutility costs than transportation costs to obtain lower prices online. When online disutility 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 online only when online disutility costs are low enough that mitigation matters. If online disutility 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 disutility costs can result in higher social welfare when dual‐channel retailers and a pure e‐tailer coexist.