Should Retailers Integrate Their Offline and Online Channels? A Perspective of Product Descriptions and Consumer Reviews

Abstract

We consider a retailer selling a single product to consumers through an offline (brick-and-mortar) channel and an online channel. The consumers in each channel are heterogeneous such that the product fits the tastes of only a fraction of these consumers. The retailer provides a product description for each channel to help the consumers assess whether the product fits their tastes. The two channels are either operated separately with different product description levels or integrated with a common product description level. We construct a two-period game-theoretical model in which the retailer optimizes the product description levels to maximize her expected profit. We find that integrating the offline and online channels yields more profit to the retailer if and only if the offline channel's product description limit and the consumers' base product valuation are small. We further consider a review system where the consumers who purchase the product in period 1 may post their reviews. The fraction of positive reviews in period 1 will influence the purchase intention of the upcoming consumers in period 2. In the presence of the consumer reviews, even if the offline product description limit is large, it can still be more profitable to integrate the offline and online channels. Furthermore, the consumer reviews may reduce the retailer's profit if the consumers' base product valuation is sufficiently large.