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Internet Retailing as a Marketing Strategy

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  • Maarten C.W. Janssen

    ()
    (Faculty of Economics, Erasmus Universiteit Rotterdam)

  • Rob van der Noll

    ()
    (Faculty of Economics, Erasmus Universiteit Rotterdam, and CPB Netherlands Bureau for Economic Policy Analysis, The Hague)

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    Abstract

    We analyze the incentives for incumbent bricks-and-mortar firms and newentrants to start an online retail channel in a differentiated goods market. Tothis end we set up a two-stage model where firms first decide whether or notto build the infrastructure necessary to start an online retail channel and thencompete in prices using the channels they have opened up. Consumers trade-offthe convenience of online shopping and the ease to compare prices, with onlineuncertainties. Without a threat of entry by a third pure online player we findthat for most parameter constellations firms' dominant strategy is not to openan online retail channel as this cannibalizes too much on their conventionalsales. As the cannibalization effect is not present for a pure Internet player,we show that these firms will start online retail channels under a much widerrange of parameter constellations. The threat of entry may force incumbentbricks-and-mortar firms to deter entry by starting up an Internet retail channelthemselves. We also show that a low cost of building up an online retail channelor online shopping conveniences may not be to the benefit of online shoppingas the strategic interaction between firms may be such that no online retailchannel is built when the circumstances seem to be more favourable.

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    Bibliographic Info

    Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 05-038/1.

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    Date of creation: 11 Apr 2005
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    Handle: RePEc:dgr:uvatin:20050038

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    Web page: http://www.tinbergen.nl

    Related research

    Keywords: E-Commerce; Internet; multichannel competition; online uncertainty; online shopping convenience;

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    References

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    1. Maarten C.W. Janssen & Jose Luis Moraga, 2000. "Pricing, Consumer Search and the Size of Internet Markets," Tinbergen Institute Discussion Papers 00-042/1, Tinbergen Institute.
    2. Rajiv Lal & Miklos Sarvary, 1999. "When and How Is the Internet Likely to Decrease Price Competition?," Marketing Science, INFORMS, vol. 18(4), pages 485-503.
    3. Clay, Karen, et al, 2002. "Retail Strategies on the Web: Price and Non-price Competition in the Online Book Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 50(3), pages 351-67, September.
    4. Erik Brynjolfsson & Michael D. Smith, 2000. "Frictionless Commerce? A Comparison of Internet and Conventional Retailers," Management Science, INFORMS, vol. 46(4), pages 563-585, April.
    5. Maarten C.W. Janssen & Jose Luis Moraga, 2000. "Pricing, Consumer Search and the Size of Internet Markets," Tinbergen Institute Discussion Papers 00-042/1, Tinbergen Institute.
    6. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
    7. Friberg, Richard & Ganslandt, Mattias & Sandström, Mikael, 2001. "Pricing Strategies in E-Commerce: Bricks vs. Clicks," Working Paper Series 559, Research Institute of Industrial Economics.
    8. Oecd, 1998. "Electronic Commerce: Prices and Consumer Issues for Three Products: Books, Compact Discs and Software," OECD Digital Economy Papers 32, OECD Publishing.
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