“Bricks-and-mortar” vs. “clicks-and-mortar”: An equilibrium analysis

The Internet has provided traditional retailers a new means with which to serve customers. Consequently, many “bricks-and-mortar” retailers have transformed to “clicks-and-mortar” by incorporating Internet sales. Examples of companies making such a transition include Best Buy, Wal-Mart, Barnes &...

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Bibliographic Details
Published in:European journal of operational research 2008-06, Vol.187 (3), p.671-690
Main Authors: Bernstein, Fernando, Song, Jing-Sheng, Zheng, Xiaona
Format: Article
Language:English
Subjects:
Alliance
Alliances
E-commerce
Electronic commerce
Equilibrium
Game theory
Internet
MNL model
Oligopoly
Retail stores
Studies
Supply chain management
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Summary:The Internet has provided traditional retailers a new means with which to serve customers. Consequently, many “bricks-and-mortar” retailers have transformed to “clicks-and-mortar” by incorporating Internet sales. Examples of companies making such a transition include Best Buy, Wal-Mart, Barnes & Noble, etc. Despite the increasing prevalence of this practice, several fundamental questions remain: (1) Does it pay off to go online? (2) Which is the equilibrium industry structure? (3) What is the implication of this business model for consumers? We study these issues in an oligopoly setting and show that clicks-and-mortar arises as the equilibrium channel structure. However, we find that this equilibrium does not necessarily imply higher profits for the firms: in some cases, rather, it emerges as a strategic necessity. Consumers are generally better off with clicks-and-mortar retailers. If firms align with pure e-tailers to reach the online market, we show that a prisoner’s dilemma-type equilibrium may arise.
ISSN:0377-2217
1872-6860
DOI:10.1016/j.ejor.2006.04.047