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Mail versus Mall: A Strategic Analysis of Competition between Direct Marketers and Conventional Retailers

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  • Sridhar Balasubramanian

    (Department of Marketing Administration, CBA 7.202, The University of Texas at Austin, Austin, Texas 78712-1176)

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    Abstract

    Consumers now purchase several offerings from direct sellers, including catalog and Internet marketers. These direct channels exist in parallel with the conventional retail stores. The availability of multiple channels has significant implications for the performance of consumer markets. The literature in marketing and economics has, however, been dominated by a focus on the conventional retail sector. This paper is an effort toward modeling competition in the multiple-channel environment from a strategic viewpoint. At the outset, a parsimonious model that accommodates the following consumer and market characteristics is introduced. First, the relative attractiveness of retail shopping varies across consumers. Second, the fit with the direct channel varies across product categories. Third, the strength of existing retail presence in local markets moderates competition. Fourth, in contrast with the fixed location of the retail store that anchors its localized market power, the location of the direct marketer is irrelevant to the competitive outcome. The model is first applied in a setting where consumers have complete knowledge of product availability and prices in all channels. In the resulting equilibrium, the direct marketer acts as a competitive wedge between retail stores. The direct presence is so strong that each retailer competes against the remotely located direct marketer, rather than against neighboring retailers. This outcome has implications for the marketing mix of retailers, which has traditionally been tuned to attract consumers choosing between retail stores. In the context of market entry, conditions under which a direct channel can access a local market in retail entry equilibrium are derived. Our analysis suggests that the traditional focus on retail entry equilibria may not yield informative or relevant findings when direct channels are a strong presence. Next, the role of information in multiple-channel markets is modeled. This issue is particularly relevant in the context of direct marketing where the seller can typically control the level of information in the marketplace, sometimes on a customer-by-customer basis (e.g., by deciding on the mailing list for a catalog campaign). When a certain fraction of consumers does not receive information from the direct marketer, the retailers compete with each other for that fraction of the market. The retailer's marketing mix has to be tuned, in this case, to jointly address direct and neighboring retail competition. The level of information disseminated by the direct marketer is shown to have strategic implications, and the use of market coverage as a lever to control competition is described. Even with zero information costs, providing information to all consumers may not be optimal under some circumstances. In particular, when the product is not well adapted to the direct channel, the level of market information about the direct option should ideally be lowered. The only way to compete with retailers on a larger scale with a poorly adapted product is by lowering direct prices, which lowers profits. Lowering market information levels and allowing retailers to compete more with each other facilitates a higher equilibrium retail price. In turn, this allows a higher direct price to be charged and improves overall direct profit. On the other hand, when the product is well adapted, increasing direct market presence and engaging in greater competition with the retail sector yields higher returns. The finding that high market coverage may depress profits raises some issues for further exploration. First, implementing the optimal coverage is straightforward when the seller controls the information mechanism, as in the case of catalog marketing. The Internet, in contrast, is an efficient mechanism to transmit information, but does not provide the sellers with such control over the level of market information. A key reason is that the initiative to gather information on the Internet lies largely with consumers. The design and implementation of mechanisms to control aggregate information levels in electronic markets can, therefore, be an important theme for research and managerial interest. Second, direct marketers have traditionally relied on the statistical analysis of customer records to decide on contact policies. The analysis in this paper reveals that these policies can have significant strategic implications as well. Research that integrates the statistical and strategic aspects could make a valuable contribution. The paper concludes with a discussion of issues for future research in multiple-channel markets, including avenues to model competition in settings with multiple direct marketers.

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    File URL: http://dx.doi.org/10.1287/mksc.17.3.181
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    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 17 (1998)
    Issue (Month): 3 ()
    Pages: 181-195

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    Handle: RePEc:inm:ormksc:v:17:y:1998:i:3:p:181-195

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    Related research

    Keywords: channels of distribution; catalog marketing; direct marketing; electronic marketing; internet marketing; competitive strategy; game theory;

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    Cited by:
    1. Keen, Cherie & Wetzels, Martin & de Ruyter, Ko & Feinberg, Richard, 2004. "E-tailers versus retailers: Which factors determine consumer preferences," Journal of Business Research, Elsevier, vol. 57(7), pages 685-695, July.
    2. Madden Paul & Pezzino Mario, 2011. "Oligopoly on a Salop Circle with Centre," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-30, January.
    3. Keen,Cherie & Wetzels,Martin & Ruyter,Ko,de & Feinberg,Richard, 2001. "E-tailers versus Retailers: Which Factors Determine Consumer Preferences," Research Memorandum 016, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    4. Xiao, Tiaojun & Choi, Tsan-Ming & Cheng, T.C.E., 2014. "Product variety and channel structure strategy for a retailer-Stackelberg supply chain," European Journal of Operational Research, Elsevier, vol. 233(1), pages 114-124.
    5. Keen, C. & Wetzels, M., 2001. "Exploring the Preference Structure for Online and Traditional Retail Formats," Working Papers 01.18, Eindhoven Center for Innovation Studies.
    6. Keen, C. & Wetzels, M., 2001. "Exploring the Preference Structure for Online and Traditional Retail Formats," Eindhoven Center for Innovation Studies (ECIS) working paper series 01.18, Eindhoven Center for Innovation Studies (ECIS).
    7. Xiong, Yu & Yan, Wei & Fernandes, Kiran & Xiong, Zhong-Kai & Guo, Nian, 2012. "“Bricks vs. Clicks”: The impact of manufacturer encroachment with a dealer leasing and selling of durable goods," European Journal of Operational Research, Elsevier, vol. 217(1), pages 75-83.
    8. Nakayama, Yuji, 2009. "The impact of e-commerce: It always benefits consumers, but may reduce social welfare," Japan and the World Economy, Elsevier, vol. 21(3), pages 239-247, August.
    9. Hendrikse, G.W.J. & Jiang, T., 2007. "An Incomplete Contracting Model of Governance Structure Variety in Franchising," ERIM Report Series Research in Management ERS-2007-049-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
    10. Patrick Legros & Konrad Stahl, 2003. "Global vs.Local Competition," DNB Staff Reports (discontinued) 97, Netherlands Central Bank.
    11. Chris Forman & Anindya Ghose & Avi Goldfarb, 2006. "Geography and Electronic Commerce: Measuring Convenience, Selection, and Price," Working Papers 06-15, NET Institute, revised Sep 2006.
    12. Matthias Firgo & Dieter Pennerstorfer & Christoph Weiss, 2012. "Centrality and Pricing in Spatially Differentiated Markets: The Case of Gasoline," WIFO Working Papers 432, WIFO.
    13. Hendrikse, G.W.J., 2011. "Pooling, Access, and Countervailing Power in Channel Governance," ERIM Report Series Research in Management ERS-2011-009-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
    14. Jérôme FONCEL & Marianne GUYOT & Frédéric JOUNEAU - SION, 2011. "The shop around the corner in the Internet age," Discussion Papers (REL - Recherches Economiques de Louvain) 2011025, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    15. Cai, Gangshu (George) & Zhang, Zhe George & Zhang, Michael, 2009. "Game theoretical perspectives on dual-channel supply chain competition with price discounts and pricing schemes," International Journal of Production Economics, Elsevier, vol. 117(1), pages 80-96, January.
    16. Avi Goldfarb, 2014. "What is Different About Online Advertising?," Review of Industrial Organization, Springer, vol. 44(2), pages 115-129, March.
    17. Rohm, Andrew J. & Swaminathan, Vanitha, 2004. "A typology of online shoppers based on shopping motivations," Journal of Business Research, Elsevier, vol. 57(7), pages 748-757, July.
    18. Xu, Guangye & Dan, Bin & Zhang, Xumei & Liu, Can, 2014. "Coordinating a dual-channel supply chain with risk-averse under a two-way revenue sharing contract," International Journal of Production Economics, Elsevier, vol. 147(PA), pages 171-179.
    19. Hu, Yu Jeffrey & Tang, Zhulei, 2014. "The impact of sales tax on internet and catalog sales: Evidence from a natural experiment," International Journal of Industrial Organization, Elsevier, vol. 32(C), pages 84-90.
    20. Prince, Jeffrey T., 2007. "The beginning of online/retail competition and its origins: An application to personal computers," International Journal of Industrial Organization, Elsevier, vol. 25(1), pages 139-156, February.
    21. repec:ebl:ecbull:v:12:y:2007:i:31:p:1-8 is not listed on IDEAS
    22. Legros, Patrick & Stahl, Konrad O., 2002. "Global versus Local Competition," CEPR Discussion Papers 3333, C.E.P.R. Discussion Papers.
    23. Yan, Ruiliang & Ghose, Sanjoy, 2010. "Forecast information and traditional retailer performance in a dual-channel competitive market," Journal of Business Research, Elsevier, vol. 63(1), pages 77-83, January.
    24. Yuanzhu Lu & Xiaolin Xing & Fang-Fang Tang, 2008. "Retailers' Incentive to Sell through a New Selling Channel and Pricing Behavior in a Multi-channel Environment," Annals of Economics and Finance, Society for AEF, vol. 9(2), pages 315-343, November.

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