When Showrooming Increases Retailer Profit

Abstract

Showrooming, the phenomenon of consumers visiting a brick-and-mortar store to learn about products but then buying online to obtain lower prices, is attracting increased attention both in business practice and in academic literature. It is usually considered as a major threat to the brick-and-mortar retailers; “how to fight it” seems the only consideration. However, the manufacturer’s need for retail informational services has always been one of the essential reasons for retailers to exist and a means for retailers to achieve profitability. The popular arguments about the threat of showrooming ignore the strategic role of the manufacturer in the distribution channel. This paper analytically shows that when the manufacturer’s decisions are added to the consideration (i.e., when the manufacturer-retailer contract is endogenous), the ability of consumers to engage in showrooming may lead to increased, rather than decreased, profitability of brick-and-mortar retailer(s). Thus, retail efforts to restrict showrooming behavior may be misguided. This result holds even if the manufacturer is restricted to wholesale-only contracts and is not allowed to price discriminate between channels.