Showrooming and the competition between store and online retailers

Abstract

Increasing numbers of customers are using physical store retailers' outlet to evaluate products. Although this helps them to identify their "best fit" product, they often end up buying the product not at the store but rather at a competing online retailer to take advantage of lower prices. This free-riding behavior by customers is referred to as "showrooming." We study a game theoretic model to analyze the competitive equilibrium where customers free-ride, and show that the profits of the store retailer are reduced compared to the situation when customers do not free-ride. This finding is in line with the current debate in the retailing industry where store retailers are discussing ways and means to improve their profits in the face of such showrooming. We also analyze the impact on the profits of a physical store retailer stocking a different assortment from that of the online retailer and show that this strategy may, under certain situations, improve its profits. Keywords: online retailing, showrooming, retail competition, pricing, game theory.