Channel encroachment strategy through pure online or combined offline retailing

Abstract With the rise of e-commerce, an increasing number of retailers concentrate on the online channel to sell their products (strategy O), while some retailers select online and offline combined retailing. That is, the retailers introduce an offline experience store in addition to their online channels (strategy B). However, there is little literature on which strategies are better when a retailer’s intrusion is considered. This paper constructs a competitive system in which the incumbent is a well-established pure online retailer and the new entrant will decide which strategy to select, strategy O or strategy B. The hotelling model is applied to represent the competitive market of both retailers through consumers’ asymmetrical preference for products, and Nash games under two strategies are built. Through comparing equilibrium solutions, we show that when consumers prefer the incumbent’s product, online and offline retailing is an effective strategy for the new entrant to compete with the incumbent. Meanwhile, the incumbent’s advantage does not always benefit him. Consumers’ asymmetrical preference for products may intensify the competition between them and hurt their profits, but the new entrant can benefit from providing offline retailing under most cases.