How to operate physical showrooms: Service decision and pricing based on product quality

Abstract

This paper addresses operation strategies of the physical showroom under e-commerce and studies joint decisions of the showroom service and pricing based on product quality. First, we propose an analytical model to capture the feature of consumer purchase behaviors and examine the three operation strategies: the cooperation operation (CO), the manufacturer operation (MO), and the e-retailer operation (RO). Then, the equilibriums in the above three strategies are obtained and analyzed based on product quality. Besides, we extend the model to the scenario of endogenous product quality. The results are as follows. First, in contrast to the conventional wisdom, we find that the optimal showroom service may decrease with product quality when the production cost coefficient is high. Second, both product quality and production cost should be considered before opening physical showrooms. When the production cost coefficient is low, the MO strategy and the RO strategy are better than the CO strategy, which means that the enterprise should open the physical showroom separately. However, when the production cost coefficient is high, the CO strategy provides the optimal showroom service and the enterprises should cooperate to balance costs and benefits. Moreover, when product quality is endogenous, our analysis reveals that the RO strategy may offer better product quality than the CO strategy when the production cost coefficient is moderate.