The interaction between manufacturer’s showroom deployment and online selling formats

Abstract

Many manufacturers selling through online retail platforms are deploying physical showrooms to facilitate consumers’ learning about their products. To uncover the effects of the manufacturer-deployed showrooms on participants in a platform-based distribution channel, we establish a game-theoretic model wherein a manufacturer sells through an online retailer under either agency selling or wholesale selling, and consumers decide sequentially on showrooming and purchasing. We find that, firstly, despite the merits of showrooms in resolving consumers’ valuation uncertainty, the deployment of showrooms may unexpectedly engender more product returns (i.e., return exacerbation effect), which hurts the retailer under wholesale selling when the consumers’ travel cost is moderate. Second, the manufacturer under each selling format tends to benefit (suffer) from showrooms in the case of low (high) travel cost; in addition, the decrease in commission rate boosts the gain from showroom deployment, making the manufacturer under agency selling more likely to deploy showrooms, especially when the travel cost is moderate. Third, in anticipation of the manufacturer’s (not) deploying showrooms and the corresponding profit impacts, the channel members may adopt varying preferences for the selling format. Notably, they have aligned preferences for agency selling with medium low commission rate, while neither prefers agency selling with relatively high commission rate and travel cost. This study sheds light on the flourishing practice of manufacturer-deployed showrooms, clarifying their impacts on the platform-based distribution channel.