The impact of electronic commerce on the marketing channel competition

Since the advent of the World Wide Web, "the Internet has emerged as a shopping channel with undeniable power to facilitate and increase sales of a growing range of products" (Ernst & Young, Special Report, 1998). With commercial activity on the Internet gaining momentum, and with technological developments involving more secure means of making payments, sending documents, and verifying the identity of the consumer, electronic malls are opening up a new vista of opportunities. We study the competition between two competing marketing channels: online stores and traditional retail stores, and focus on profitability and expansion of marketing channels as a function of consumer characteristics and stores' cost structure. A consumer's choice of a store is determined by price differences, perceived risks, network comfort level, customization, information accuracy, and discomfort level (logical distance between the consumer and the traditional retail store). Based on the Hotelling's model of spatial competition, Nash equilibria of price and demand ape derived. We find that the number of traditional retail store has no effect on the optimal pricing strategies of either the online store or the traditional retail stores when the retail shops belong to one chain. Another interesting finding is that the optimum price strategies of the channels move in the same direction at different rates as the importance of the network comfort level changes. This paper provides a foundation for analyzing economic aspects of businesses (electronic commerce) on the Internet. It offers managerial insights for both online store management and retail store management regarding issues such as marketing strategies in competition, business expansion strategies, investment complementarity, and diseconomies of scope.