Look before you leap: Economics of being an omnichannel retailer

Abstract

This paper investigates how the market gets segmented when an omnichannel retailer enters a market hitherto served by non-omnichannel retailers. The added value derived from the omnichannel flexibility is expected to draw more customers to an omnichannel retailer, luring them away from the incumbent non-omnichannel peers. However, the customers are expected to be heterogeneous in their valuation of the omnichannel flexibilities offered. Also, since acquiring omnichannel flexibility entails additional costs for service integration, the omnichannel aspirant is expected to charge a higher price from the customers than its non-omnichannel competitors. Our model considers both these factors, and derives analytical expression for the expected market share of the omnichannel retailer as a function of the price charged by the non-omnichannel peers, the extent of flexibility provided, and the cost of providing the same. Also, given the cost of service integration, we estimate the level of flexibility that an omnichannel retailer must offer if it wants to acquire a specific market share. The findings indicate that the associated integration cost imposes a restriction on the maximum market share an omnichannel entrant can aspire to capture.