Spatial pricing and the strategic choice of retail formats

Toshitaka Gokan, Jacques-François Thisse and Xiwei Zhu

No 968, IDE Discussion Papers from Institute of Developing Economies, Japan External Trade Organization(JETRO)

Abstract: We develop a model in which offline and online transportation costs, online shopping disutility cost and consumer taste heterogeneity, and online and offline retailers' pricing policies interact to determine the equilibrium retail format that emerges from firms' and consumers' choices. This is done by combining spatial pricing and discrete choice theory within a unified game-theoretic framework. We study the industry equilibrium, as well as the corresponding consumer surplus and total welfare. Our results show that firms' choices of a retail format and consumers' decision to buy from an offline or online firm often depend on consumers' locations relative to firms'. Comparing aggregate consumer surpluses shows that consumers prefer online to alternative channels when they are sufficiently heterogeneous, but this need not be so when heterogeneity is weak. When consumers' tastes are heterogenous enough, the retail format maximizing total welfare depends on the value of the distaste costs of online purchase. Thus, the nature of products supplied by retailers is likely to affect the socially desirable retailing system through the degree of product differentiation.

Keywords: Offline; retailing|online; retailing|spatial; price; policies (search for similar items in EconPapers)
JEL-codes: L13 L81 R10 (search for similar items in EconPapers)
Date: 2025-03
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Published in IDE Discussion Paper = IDE Discussion Paper, No.968. 2025-03

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