Multichannel retailer's channel choice and product pricing: Influence of investment in fit-disclosing technology by competing retailers

Abstract

The retail market consists of both multichannel and pure online retailers. While the pure online retailers sell through the online channel only, multichannel retailers face the dilemma regarding the channel through which they should sell their product — either through brick-and-mortar (BM) store, online channel, or both. Whereas the online channel saves consumers the hassle of a physical visit to the store, the product purchased online may not be as per the consumers’ expectations. Technologies that disclose product fit can reduce the fit uncertainty, if accurately conveyed to the consumer. Enhancing the accuracy raises the retailers’ technology investment. For the multichannel retailer, the consumers can also verify the product fit by visiting the BM store. Motivated by this dilemma, we examine how investment in fit-disclosing technologies by competing retailers influences the multichannel retailer’s channel choice and pricing strategy. Our findings suggest that without the competing retailers altering their technological investment, the multichannel retailer may sell the product through any channel contingent on the importance of physically verifying a product. Interestingly, our research shows that the multichannel retailer can sell the product even with a low technological investment if consumers are less likely to visit BM stores. When the competing retailers decide on the technological investment, the minimum technological investment required by the multichannel retailer to sell the product through the online channel may increase. We also extend our model to understand the implications of consumer characteristics, segments and retailer’s cost structure on retailers’ decisions pertaining to technology and price.