Multi-channel retailing with product differentiation

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2015
Uğur, Havva Gülçin
In this study, we analyze a monopolist retailer’s product differentiation problem in a multi-channel environment. We investigate the type of conditions that would motivate retailer to open an outlet branch, to open an online channel, and to even potentially open an online channel for the outlet branch, and how these decisions interact with each other. We use quality and price as the primary drivers in the outlet business decision in a vertical differentiation model. In the outlet business decision, specifically, we investigate the quality and price decision of the retailer for his outlet branch and whether he will be better off in terms of total profit. For the online channel, we determine the online service quality and other factors that affect the end-consumer’s utility. Online service quality may involve all customer services provided by the online store, the convenience of return process, and promised delivery time windows as well as shipping charges. We find that the retailer’s decision hinges on the market expansion versus market/margin cannibalization. We show that even a direct channel for the outlet store may be preferable for the retailer, depending on the market characteristics.