Competition Between Offline and Online Retailers with Heterogeneous Customers
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Competition Between Offline and Online Retailers with Heterogeneous Customers Stefano Colombo1 · Noriaki Matsushima2
© Springer Science+Business Media, LLC, part of Springer Nature 2019
Abstract We consider the spatial competition between two traditional physical (or offline) retailers and an Internet (or online) retailer where the efficiency of the latter differs from that of the former. We assume that consumers are heterogeneous across two dimensions: (1) the costs of traveling to either of the offline retailers; and (2) the costs of purchasing from the online retailer. Both dimensions depend on the spatial location of consumers and are independent of each other. We show that the online retailer maximizes its profit at an intermediate level of the consumer disutility of online purchase when its efficiency is low. Keywords E-commerce · Game theory · Horizontal differentiation · Vertical differentiation JEL Classification L13 · D43
1 Introduction While online retailers have strongly developed their presence in retail markets, offline retailers continue to play an important role (Choi et al. 2012) for the following three reasons. First, some customers lack the ability to use the Internet, such as
* Stefano Colombo [email protected] Noriaki Matsushima [email protected]‑u.ac.jp 1
Department of Economics and Finance, Università Cattolica del Sacro Cuore, Largo Gemelli 1, I‑20123 Milan, Italy
2
Institute of Social and Economic Research, Osaka University, Mihogaoka 6‑1, Osaka, Ibaraki 567‑0047, Japan
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not knowing how to find the most suitable website for their needs. Second, purchasing from online retailers incurs several costs, including those that relate to the waiting time for delivery or the limited information available on products.1 Last, some customers may prefer offline retailers because they prefer the feeling of shopping in physical places or they wish to share time shopping with family and friends. The quality of service is a crucial element in the marketing mix of online retailers. Therefore, some e-retailers will attempt to improve the quality of their services, such as the quality of their website and the options that are available for consumers when browsing the website.2 It seems intuitive that online retailers will want to improve the quality of their online services as much as possible, thus minimizing the disutility of consumers when making online purchases. However, we also observe that at least in some cases, online retailers will not minimize the disutility costs of consumers purchasing from them, even if doing so would be without apparent excessive costs. For example, Dell’s online retailers use highly technical language when describing product characteristics; the language is easily understood by expert users, but not by computer novices. Similarly, ArredoDesign Online—an online retailer that specializes in home furnishings and interior design—offers a choice of different product colors. However, it depicts only one of
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