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Spatial pricing and the strategic choice of retail formats

Author

Listed:
  • Gokan, Toshitaka
  • Thisse, Jacques-François

    (Université catholique de Louvain, LIDAM/CORE, Belgium)

  • Zhu, Xiwei

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.

Suggested Citation

  • Gokan, Toshitaka & Thisse, Jacques-François & Zhu, Xiwei, 2025. "Spatial pricing and the strategic choice of retail formats," LIDAM Discussion Papers CORE 2025008, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2025008
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    References listed on IDEAS

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    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General

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