“Bricks and Clicks”: The Impact of Product Returns on the Strategies of Multichannel Retailers

Abstract

T he Internet has increased the flexibility of retailers, allowing them to operate an online arm in addition to their physical stores. The online channel offers potential benefits in selling to customer segments that value the convenience of online shopping, but it also raises new challenges. These include the higher likelihood of costly product returns when customers' ability to "touch and feel" products is important in determining fit. We study competing retailers that can operate dual channels ("bricks and clicks") and examine how pricing strategies and physical store assistance levels change as a result of the additional Internet outlet. A central result we obtain is that when differentiation among competing retailers is not too high, having an online channel can actually increase investment in store assistance levels (e.g., greater shelf display, more-qualified sales staff, floor samples) and decrease profits. Consequently, when the decision to open an Internet channel is endogenized, there can exist an asymmetric equilibrium where only one retailer elects to operate an online arm but earns lower profits than its bricks-only rival. We also characterize equilibria where firms open an online channel, even though consumers only use it for research and learning purposes but buy in stores. A number of extensions are discussed, including retail settings where firms carry multiple product categories, shipping and handling costs, and the role of store assistance in impacting consumer perceived benefits.

The Evolution of Marketing Channels: Trends and Research Directions

“…However, these technologies can increase competition, because entry costs fall low enough that new entrants enter the market and sell directly to consumers, with reduced temporal, geographic, or information barriers (Avery et al 2012). The flexibility afforded to online-only retailers also puts price pressure on retailers that maintain physical locations (Ofek, Katona, and Savary 2010); in response, many firms implement multichannel strategies to leverage the benefits of e-commerce technologies (Kushwaha and Shankar 2013). In terms of channel management, e-commerce has enabled the creation of a new type of channel intermediary, the Internet affiliate, which introduces many unresolved channel governance issues (Gilliland and Rudd 2013).…”

Online versus bricks-and-mortar retailing: a comparison of price, assortment and delivery time

“…The multichannel retailing literature in the marketing field has focused on the impact of the new online channel on the traditional channel and whether traditional retailers should embrace the new channel (Deleersnyder et al 2002;Liu, Gupta, and Zhang 2006;Ofek, Katona, and Sarvary 2011;Yang, Essegaier, and Bell 2005;Zettelmeyer 2000;Zhang 2009). Our study extends this stream of research by simultaneously modelling the retailers' price, assortment and delivery time decisions and comparing the performance difference between the online and traditional retailers.…”

Integration of Online and Offline Channels in Retail: The Impact of Sharing Reliable Inventory Availability Information

“…Some recent work in marketing and information systems has explored Gallino and Moreno: Integration of Online and Offline Channels in Retail Article submitted to Management Science; manuscript no. MS-12-01440 5 related issues, such as customer channel migration (Ansari et al 2008), the choice between online and offline channels in grocery stores (Chintagunta et al 2012), the impact of product returns on a multichannel retailer (Ofek et al 2011), or customer behavior in multichannel customer service (Jerath et al 2012). Competition between brick-and-mortar and online channels has been studied by Brynjolfsson et al (2009) andForman et al (2009), among others.…”