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“Bricks-and-Mortar” vs. “Clicks-and-Mortar”: an Equilibrium Analysis

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“Bricks-and-Mortar” vs. “Clicks-and-Mortar”: an Equilibrium
Analysis
Fernando Bernstein

Jing-Sheng Song

Xiaona Zheng

The Fuqua School of Business

The Fuqua School of Business

Guanghua School of Management

Duke University

Duke University

Peking University

Durham, NC 27708

Durham, NC 27708

Beijing, China 100871

Forthcoming in European Journal of Operational Research

The Internet has provided traditional retailers a new means with which to serve customers.
Consequently, many “bricks-and-mortar” retailers have transformed to “clicks-and-mortar” by incorporating Internet sales. Examples of companies making such a transition include Best Buy,
Wal-Mart, Barnes & Noble, etc. Despite the increasing prevalence of this practice, several fundamental questions remain: (1) Does it pay off to go online? (2) Which is the equilibrium industry structure? (3) What is the implication of this business model for consumers? We study these issues in an oligopoly setting and show that clicks-and-mortar arises as the equilibrium channel structure.
However, we find that this equilibrium does not necessarily imply higher profits for the firms: in some cases, rather, it emerges as a strategic necessity. Consumers are generally better off with clicks-and-mortar retailers. If firms align with pure e-tailers to reach the online market, we show that a prisoner’s dilemma-type equilibrium may arise.

Keywords: Supply chain management, Game theory, E-commerce, MNL model, Alliance

1

Introduction

The rapid development of information technologies has provided new means for retailers to reach the end market. As substantially more consumers have gained Internet access and found it both convenient and secure to shop online, e-commerce has become attractive to more firms. Various
Internet-enabled business models have emerged. Among those, an important

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