Cooperation or Co-Opetition? Optimal Offline Showroom Partnership for an Online Manufacturer Under Information Asymmetry

Abstract

ABSTRACT When an online manufacturer suffers from demand reduction and product return caused by product fit uncertainty, it could display products in a retailer’s store to provide the chance for consumers to examine whether the product fits their needs. According to whether the product the retailer sells is noncompetitive or competitive, this study considers that there are cooperation and co-opetition strategies for the online manufacturer to realize an offline showroom partnership. In addition, the retailer would provide retail service for consumers who visit the store, while the service cost information is private. Thus, this study explores the optimal offline showroom partnership for an online manufacturer under information asymmetry. The results show that although partnering with a competitive retailer causes product competition, the online manufacturer would prefer the co-opetition strategy if (i) the competition intensity between the two products is low or (ii) the competition intensity is high and the cost to handle the returned product is low, and would prefer the cooperation strategy otherwise. Under the optimal strategy, the online manufacturer should design the contract according to the return handling cost. Nevertheless, the online manufacturer could set a higher price under the co-opetition strategy than that under the cooperation strategy. After comparing the online manufacturer’s optimal strategies and profits in different information environments, we find that product competition could reduce the online manufacturer’s profit loss caused by information asymmetry under certain conditions, and the online manufacturer with low return handling cost is more willing to adopt the co-opetition strategy under information asymmetry.