Retailers' Incentive to Sell through a New Selling Channel and Pricing Behavior in a Multi-channel Environment

We consider a duopoly market in which two retailers with different reputation compete in prices and one of the retailers is considering selling through a new channel. Consumers are reputation sensitive and averse to the new channel. In addition, the reputation sensitivity and new channel aversion are heterogeneous across consumers. In such a setting, we find that, there must be some cost reduction for the good reputation retailer to have an incentive to sell through a new channel unless consumers are sufficiently averse to the new channel. The good reputation retailer may keep or withdraw its old channel and may coexist with the bad reputation retailer or drive it out of the market, depending on the combination of cost reduction and the degree of consumers' aversion to the new channel. On the contrary, even if cost increases by a small amount, the bad reputation retailer also has an incentive to sell through the new channel. The bad reputation retailer always withdraws the old channel, and it may coexist with the good reputation retailer or drive it out of the market, depending on the cost difference between its two channels.