Demand Expansion and Cannibalization Effects From Retail Store Entry: A Structural Analysis of Multi-Channel Demand

Abstract

In this paper, we investigate the demand response of a firm’s existing customers to retail store entry and which aspects of the response are demand-expanding and which cannibalize online sales. The empirical goal of the paper is to separately identify the effects of customer-to-store distance on purchase frequency, channel choice and expenditure per purchase, using transaction-level data from a multi-channel apparel brand. Our identification strategy exploits within-customer variation in distance resulting from store entry, during a period of rapid retail expansion. We establish retail distance effects using descriptive regressions before developing a unified structural model that affords rich counterfactual analyses and further controls for product category preferences. We find material effects of decreasing retail store distance on purchase frequency and retail channel choice, but not expenditures per purchase. Our structural model ascribes mechanisms to these effects in the form of increased brand consideration, higher retail utility from non-monetary factors (e.g. reduced driving times), and infungibility of monetary transportation costs with budgets for apparel. Our estimates imply a 10% reduction in retail store distance increases retail channel expenditures by 1.9% and decreases online channel expenditures by 1.2%, resulting in a 0.4% increase in total expenditures. Through counterfactual experiments, we demonstrate that retail expansion can ultimately limit the ability of the firm to price discriminate across channels, since reducing transportation costs weakens the firm’s ability to enforce channel-based segmentation schemes.

Keywords: Channels of distribution, pricing, discrete-continuous models, market entry