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Bricks and clicks: the impact of product returns on the strategies of multi-channel retailers

Author: Ofek, Elie ; Sarvary, Miklos ; Katona, ZsoltINSEAD Area: Marketing Series: Working Paper ; 2007/33/MKT Publisher: Fontainebleau : INSEAD, 2007.Language: EnglishDescription: 33 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: The Internet has increased the flexibility of retailers allowing them to operate an online arm in addition to their physical stores. While the online channel offers retailers potential advantages in selling to customer segments that value the conveniences of online shopping, it also raises new challenges. These include the higher likelihood of costly product returns when customers ability to touch and feel the product is important in determining fit. We study competing retailers operating dual channels (Bricks and Clicks) and examine how pricing strategies and the level of physical store assistance change as a result of the additional Internet outlet. On the supply-side, firms endogenously determine prices and how much to invest in store characteristics that assist customers in finding matching products (e.g., greater shelf display capacity, more qualified staff, floor samples). On the demand-side, we capture two relevant sources of customer heterogeneity: (i) retailer preference, and (ii) shopping trip costs. A central result we obtain is that when differentiation among retailers is not too high, having an online channel actually increases (costly) investment in store assistance levels while prices are set higher. We also examine how firms range of product categories can vary between the two channels. Our main finding here is that even though it is costless to offer products online, retailers will sell only a limited assortment over the Internet. In articular, only safe products with a low chance of being returned will be sold online, while retailers full range of products will be sold in physical stores.
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The Internet has increased the flexibility of retailers allowing them to operate an online arm in addition to their physical stores. While the online channel offers retailers potential advantages in selling to customer segments that value the conveniences of online shopping, it also raises new challenges. These include the higher likelihood of costly product returns when customers ability to touch and feel the product is important in determining fit. We study competing retailers operating dual channels (Bricks and Clicks) and examine how pricing strategies and the level of physical store assistance change as a result of the additional Internet outlet. On the supply-side, firms endogenously determine prices and how much to invest in store characteristics that assist customers in finding matching products (e.g., greater shelf display capacity, more qualified staff, floor samples). On the demand-side, we capture two relevant sources of customer heterogeneity: (i) retailer preference, and (ii) shopping trip costs. A central result we obtain is that when differentiation among retailers is not too high, having an online channel actually increases (costly) investment in store assistance levels while prices are set higher. We also examine how firms range of product categories can vary between the two channels. Our main finding here is that even though it is costless to offer products online, retailers will sell only a limited assortment over the Internet. In articular, only safe products with a low chance of being returned will be sold online, while retailers full range of products will be sold in physical stores.

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