For showing only, or for selling? The optimal physical store mode selection decision for e-tailers under competition

More and more e-tailers are launching physical stores, in addition to their online presence. Whether and when it is best for the physical channel to be a pure showroom or a selling store remains unanswered. To address this issue, we develop a game-theoretical model wherein two competitive e-tailers decide to launch physical stores for showing only (as a showroom) or for actual transactions (as a selling store). By deriving the equilibrium, we obtain three major findings. First, building a pure showroom or a pure selling store is not always optimal. Interestingly, when the proportion of the store consumer segment is not too high, and the strength of the consumers' brand preference is intermediate, an asymmetric channel configuration occurs in equilibrium, that is, one e-tailer launches a showroom and the other launches the selling store. Second, if the strength of the consumers' brand preference is high relative to the proportion of the store consumer segment, a prisoner's dilemma emerges, that is, both e-tailers are worse off in the pure showroom channel configuration. Third, the total consumer surplus reaches the highest level if a symmetric showroom or an asymmetric channel equilibrium occurs. Otherwise, the equilibrium channel configurations are always suboptimal for consumers.

Automated summary

The study suggests that it is not always optimal for e-tailers to open physical stores as showrooms or selling stores in the retail sector. The relationship between consumers' brand preference strength and the proportion of store consumer segment affects the final channel configuration. The highest level of consumer total surplus can only be achieved when there is a symmetric showroom or an asymmetric channel equilibrium.