Retailers' distribution channel strategies with cross-channel effect in a competitive market

Abstract

The development of e-commerce has motivated many traditional brick-and-mortar retailers to redesign their distribution strategies by adding a new online channel to supplement their retail channels. This online-and-offline channel (OOC) strategy is widely acknowledged as a promising strategy. However, when considering the cross-channel effect, i.e., online channel may have different impacts on the sales of the offline channel in different industries, retailers may not always prefer the OOC strategy even if the fixed cost of developing the online channel is negligible. In this paper, we investigate the impacts of cross-channel effect on the two competing traditional retailers' distribution channel strategies. By a two-period game-theoretic model, we show that the retailers may give up the OOC strategy when the cross-channel effect is significant negative. By contrast, when the cross-channel effect is insignificant negative or positive, both retailers prefer the OOC strategy even if they may be involved into the prisoners' dilemma. That is, although the Pareto equilibrium is to forego the OOC strategy, the optimal choice is to implement it. We later relax the assumption of simultaneous price game by allowing one retailer move first to determine its price. We find that our main results still hold but the prisoners' dilemma is more likely to avoid under the sequential price game than under the simultaneous price game.