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

56 Pages Posted: 30 Apr 2015 Last revised: 14 Jan 2020

See all articles by Scott Shriver

Scott Shriver

University of Colorado at Boulder - Department of Marketing

Bryan Bollinger

New York University (NYU) - Department of Marketing

Date Written: January 7, 2020

Abstract

For a multi-channel retailer, opening a physical store can lead to cannibalization of online sales as consumers’ transportation costs decrease. Holding purchase frequency fixed, this channel switching behavior represents an economic loss to the firm if customers buy fewer or lower margin items in retail stores. However, greater proximity to a retail outlet may increase consumer awareness and consideration of the brand, leading to higher purchase frequencies across channels. In this paper, we devise and estimate a structural model to separately identify the effects of customer-to-store distance on channel switching and brand consideration. Our direct utility framework models outcomes at the level of individual purchase occasions and captures heterogeneous preferences for multiple channels and product categories. Our identification strategy exploits within-customer variation in distance resulting from store entry during a period of rapid retail expansion. We find that retail entry induces channel switching behavior but also leads to greater consideration of the brand. Our estimates imply a 10% reduction in retail store distance increases retail channel expenditures by 2.1% and decreases online channel expenditures by 0.6%, resulting in a 0.8% 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. Retail expansion remains profitable in our setting, where revenue gains from the demand-expanding effect of entry on brand consideration exceed revenue losses resulting from consumers switching to the lower cost retail channel.

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

Suggested Citation

Shriver, Scott and Bollinger, Bryan, Demand Expansion and Cannibalization Effects From Retail Store Entry: A Structural Analysis of Multi-Channel Demand (January 7, 2020). Available at SSRN: https://ssrn.com/abstract=2600917 or http://dx.doi.org/10.2139/ssrn.2600917

Scott Shriver (Contact Author)

University of Colorado at Boulder - Department of Marketing ( email )

995 Regent Dr
Boulder, CO 80309
United States

HOME PAGE: http://https://www.colorado.edu/business/scott-shriver

Bryan Bollinger

New York University (NYU) - Department of Marketing ( email )

40 W 4th St
Tisch 804
New York, NY 10012
United States

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