“Bricks and Clicks”: The Impact of Product Returns on the Strategies of Multichannel Retailers

TLDR

The rise of the Internet has enabled retailers to add online channels, offering convenience to certain customers but also increasing the risk of costly product returns when physical inspection is important. The authors model competing retailers with dual “bricks and clicks” channels to analyze how the addition of an online outlet alters pricing strategies and store‑assistance levels. The model is extended to include multiple product categories, shipping and handling costs, and the influence of store assistance on perceived consumer benefits. When product differentiation is modest, adding an online channel can raise store‑assistance investment yet lower profits, leading to asymmetric equilibria where a single retailer adopts the channel but earns less than its bricks‑only rival, and to equilibria where firms open online for research but still sell in stores.

Abstract

The Internet has increased the flexibility of retailers, allowing them to operate an online arm in addition to their physical stores. The online channel offers potential benefits in selling to customer segments that value the convenience of online shopping, but it also raises new challenges. These include the higher likelihood of costly product returns when customers' ability to “touch and feel” products is important in determining fit. We study competing retailers that can operate dual channels (“bricks and clicks”) and examine how pricing strategies and physical store assistance levels change as a result of the additional Internet outlet. A central result we obtain is that when differentiation among competing retailers is not too high, having an online channel can actually increase investment in store assistance levels (e.g., greater shelf display, more-qualified sales staff, floor samples) and decrease profits. Consequently, when the decision to open an Internet channel is endogenized, there can exist an asymmetric equilibrium where only one retailer elects to operate an online arm but earns lower profits than its bricks-only rival. We also characterize equilibria where firms open an online channel, even though consumers only use it for research and learning purposes but buy in stores. A number of extensions are discussed, including retail settings where firms carry multiple product categories, shipping and handling costs, and the role of store assistance in impacting consumer perceived benefits.