To Surf Or To Ride

Abstract

We study the competition between two shopping channels, i.e. electronic stores and retail stores, to focus on the profitability and expansion strategies of these channels as a function of consumer characteristics and store cost structure. A consumer’s choice of a store is determined by price differences, perceived risk in online buying, network comfort level, and retail discomfort level (logical distance between a consumer and a retail store). Based on Hotelling’s model of spatial competition, we find that the number of retail stores has no effect on the optimal pricing strategies of either the electronic store or the retail store. The result holds even when the retail stores belong to one chain. The optimal prices of the two channels move in the same direction at different rates with changes in the importance of network comfort level.