Product Choice and Channel Strategy for Multi-Channel Retailers

Introduction

According to Comscore Networks, online retail spending in 2006 reached $102.1 billion, marking a 24 percent increase over 2005’s $82.3 billion. An estimated 6 percent of all non-travel consumer retail spending (excluding expenditures for autos, gasoline, and food) is spent online. Also, according to Forrester Research, European e-commerce is forecasted to surge to €263 billion in 2011, with travel, clothes, groceries, and consumer electronics all reaching the €10 billion per year mark. Consequently, the rapid development of commerce on the Internet has made it attractive for many marketers to engage in direct online sales. As a result, many firms are using or pursuing both direct and distributor-based approaches to sell products. In real business world, it is not uncommon for many brick and mortar firms to create e-commerce channels that operate independently from existing physical outlets (Steinfield, Mahler and Bauer 1999; Useem 1999; Venkatesh 1999). However, recent trends indicate that an increasing number of firms have started to integrate the physical and online channels together to avoid channel conflict and gain benefits from channel integration (Ward 2001; Steinfield et al. 2002).

When a retailer employs a mixed online and traditional retail channel to sell products, an important question is how the optimal channel strategy should be identified by the retailer using a mixed online and traditional retail channel, so as to maximize its profit. In our research we use a game theoretical model to specifically examine how the product categories impact the channel strategy of retailer using a mixed channel approach under different competitive markets: two retailers and more than two retailers in the competitive market. Based on our analytical results, we determine optimal strategies for the retailers using a mixed channel approach in a competitive market.

The rest of our paper is organized as follows. Section 2 provides a summary of the relevant literature. Section 3 presents our modeling framework. In section 4, we determine optimal product categories and channel strategies for the retailer using a mixed online and traditional retail channel approach under a two-retailer competitive market. In section 5, we further analyze the optimal product categories and channel strategies for this retailer when the competitive market consists of n (n > 2) retailers. In section 6, we illustrate our findings by means of numerical examples. In section 7, we extend our model by investigating the impact of internet coverage rate on the product categories and channel strategies. Concluding remarks are presented in section 8.