Bricks and Mortar vs. Clicks and Mortar –
A Supply Chain Perspective
Fernando Bernstein, Jing-Sheng
Song, and Xiaona Zheng
The
The
Internet has provided the traditional retailers a new avenue to serve their
customers. Consequently, many bricks-and-mortar (BM) retailers have chosen to
transform to clicks-and-mortar (CM) ones by setting a new Internet channel
beside the preexisting one. Examples
include Best Buy, Wal-Mart Stores, Barnes & Noble, and many more. Despite
these industrial practices, several fundamental questions remain: (1) will it
really pay off for a bricks-and-mortar retailer to move online? (2) What would
be the equilibrium industry structure? And (3) who will be better off at the
equilibrium -- the retailers, or the consumers, or both? Using a duopoly setting, we study these
issues by comparing the outcomes of several supply-chain to supply-chain
competition scenarios. We show that CM vs. CM is indeed the equilibrium channel
structure. We find that, at equilibrium,
compared with those in the BM vs. BM scenario, (i)
business profitability, i.e., retailer’s total profit, does not change; (ii)
consumers are better off under very moderate conditions on the parameters;
(iii) overall productivity increases, i.e., the firms serve the same number of
consumers for less cost. We also extend
the model to incorporate outside options for consumers such as having retailers
that cannot enter the duopoly market. It is shown that business profitability
increases and consumers are better off under certain conditions. Finally, we
evaluate the performance of various Internet pricing strategies employed in the
marketplace. We conclude that some of
the easy-to-implement strategies are fairly effective in comparison with the
theoretical equilibrium price.