Why Competition from a Multi-Channel E-Tailer Does Not Always Benefit Consumers

Empirical studies have delivered mixed conclusions on whether the widely acclaimed assertions of lower electronic retail (e-tail) prices are true and to what extent these prices impact conventional retail prices, profits, and consumer welfare. For goods that require little in-person preor postsales support such as CDs, DVDs, and books, we extend Balasubramanian’s e-tailer-in-the-center, spatial, circular market model to examine the impact of a multichannel e-tailer’s presence on retailers’ decisions to relocate, on retail prices and profits, and consumer welfare. We demonstrate several counter-intuitive results. For example, when the disutility of buying online and shipping costs are relatively low, retailers are better off by not relocating in response to an e-tailer’s entry into the retail channel. In addition, such an entry—a multichannel strategy—may lead to increased retail prices and increased profits across the industry. Finally, consumers can be better off with less channel competition. The underlying message is that inferences regarding prices, profits, and consumer welfare critically depend on specifications of the good, disutility and shipping costs versus transportation costs (or more generally, positioning), and competition. Subject Areas: Channels, E-Commerce, and Pricing. INTRODUCTION AND BACKGROUND Commercialization of the Internet has captured the attention of researchers and businesses alike. Business-to-consumer (B2C) e-commerce—or e-tailing— promised competitively determined, convergent prices that could improve profits and consumer welfare. However, the impact of on-line prices on retail prices, profits, and consumer welfare is not clear, in part because competition now includes ∗We thank the Natural Science and Engineering Research and the Social Science and Humanities Research Councils of Canada, and the David B. Robson Professorship Endowment and the Informatics Research Center in the Haskayne School of Business at the University of Calgary for support. †Corresponding author.