The Perishability of Online Grocers*

Abstract

ABSTRACTIn this article we explore the profitability of different operations models used by online grocers and develop a linear demand model in a competitive setting to better understand the trade‐offs made by two competing online grocers in choices for distribution strategy (leverage or direct) and product focus (perishable or nonperishable). We find that the results derived in the duopoly setting are different from those in a monopolistic setting. Specifically, we determine that there is a threshold value for the secondary competitive effects in the demand function that determines how the prices and profitability of an online grocer will be affected by the supply chain length of its competitor. There is also a threshold value for the ratio of supply chain lengths of the two competitors that determines whether product perishability increases or decreases profits. We demonstrate that the existence of this threshold is robust when considering capacity constraints. Further, we show, assuming that supply chain length can be optimized, how the relative size of the infrastructure change cost (when compared with that of the competitor) coupled with the perishability of the product determines the profitability of an investment leading to a shorter supply chain.