Economic models of price competition between traditional and online retailing under showrooming

Abstract

Showrooming is a phenomenon when a customer views a product at a physical store, but buys it online from the same store’s website or from a competitor’s website. In this paper, we develop economic models of price competition between a traditional retailer and an online retailer under customer showrooming behaviour. Our results indicate that showrooming hurts the traditional retailer and benefits the online retailer in terms of sales volumes and profits. The combined offline and online market expands under showrooming. We consider two strategies—effort/investment made and online entry by the traditional retailer—to counter showrooming. Either strategy makes the traditional retailer better off, and the online retailer worse off, in terms of sales volumes and profits; also, the overall market, including offline and online sales, contracts. Moreover, when the traditional retailer makes an online entry, although its offline sales decrease, its total offline and online sales increase; also, although the overall market contracts, total online sales and the online price increase. We consider two scenarios of simultaneous and sequential moves made by the retailers to set their prices. We observe that both the retailers benefit under sequential moves than in the simultaneous move; however, the overall market demand is lower in sequential moves than in the simultaneous move. We have also conducted sensitivity analyses to check for robustness of the results. We conclude the paper by highlighting the managerial implications of this research and providing possible directions for future research.