Separation or integration: The game between retailers with online and offline channels

Abstract

A growing number of retailers, especially those with both online and offline channels, have developed “buy online and pick up in store” (BOPS) channels that offer a seamless shopping experience as a means to compete for consumers. Nevertheless, few studies have examined the impact of shipping fees borne by consumers in online channels on the adoption of BOPS channels by competing retailers. This paper builds a game-theoretic model to analyze the price and channel strategies of two retailers, considering the difference in shipping fees between their online channels. Each retailer chooses between operating online and offline channels separately or integrating the two channels to develop a BOPS channel. We first explore the optimal prices and find that if one retailer has a significant advantage in shipping fee, this retailer sets a lower price when both retailers choose the integration strategy than when both choose the separation strategy. Moreover, we identify the conditions corresponding to different equilibriums. Specifically, when the shipping fees in online channels are low enough, retailers tend to adopt the separation strategy. Nevertheless, the prisoner's dilemma may appear when retailers adopt the integration strategy without considering the similarity in the shipping fees of their online channels. Interestingly, when the unit cost of operating a BOPS channel is high enough, as the unit cost of operating a BOPS channel increases, so does the profit of the sole retailer adopting an integration strategy. Our results provide competing retailers with managerial insights on when implementing BOPS channels is beneficial to them.