Competitive pricing and advertising strategies for online retailers with “showrooming” and “webrooming”

Abstract

In recent years, customers’ showrooming and webrooming behaviors, namely, gathering information offline/online and purchasing online/offline,have become common practices. Focusing on the effect of showrooming and webrooming, we develop a generic model that captures channel switching behavior by customers and an-alyzes the decisions by the online retailer and offlinestore. We consider regular/non-regular customers in the unifiedmodel and findthat different groups of customers exhibit different channel switching behaviors. In particular, regular customers are more likely to switch since they won’t incur a learning cost. We demonstrate that showrooming and webrooming affect the online retailer’s profitnegatively since the online retailer needs to decrease its price to attract new customers. Also, the online retailer’s advertising efforts should be adjusted conversely in showrooming and webrooming cases. Next, we extend our basic model by considering a return policy and a flexibletarget capability for online retailers and show that these strategies may improve online retailer’s profitunder showrooming and webrooming. Last, but not the least, we consider another extension that allows showrooming and webrooming to arise simultaneously, namely dual-rooming. We findthat the dual- rooming behavior still hurts the online retailer. Our main results are found to be robust in several model ex-tensions. The paper has provided several insights into online retailer’s price and advertising strategies.