Interplay between quality disclosure and cross-channel free riding

doi:10.1016/j.elerap.2020.101024

Electronic Commerce Research and Applications

Volume 45, January–February 2021, 101024

https://doi.org/10.1016/j.elerap.2020.101024 Get rights and content

Highlights

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The separation of consumer information-collection channels and purchase channels.
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The impact of investment in product information disclosure on retailers of different channels.
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It may not be the best choice for retailers to actively provide product information.
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Channel characteristics affect retailer’s decision.
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Consumers’ active search for product information can affect retailers’ decision-making.

Abstract

This study investigates the interaction between online and offline retailers’ product information-disclosure decisions and the behaviors of showrooming (the phenomenon that consumers access product information offline but make the actual purchase online) or webrooming (the phenomenon that consumers access product information online but make the actual purchase offline). In these situations, consumers can only obtain product information by themselves from different channels. We find that the optimal choice for online retailers is to allow webrooming behavior and to not invest in information disclosure. Meanwhile, the optimal choice for offline retailers can be to either invest or not invest in product information disclosure. Specifically, when an offline retailer invests in product information disclosure, if the cost is low, the equilibrium profit will increase; however, if the product information-disclosure cost is high, the equilibrium profit will first increase and then decrease.

Introduction

In Roald Dahl’s 1964 novel “Charlie and the Chocolate Factory”, consumers can directly taste the chocolate they see in TV commercials. Modern technology, however, remains unable to transfer all of the attributes of products that consumers view online. A report by PushOn (2018) indicated that almost half of consumers (45%) would be more persuaded to buy a product online if they could use some form of technology to see the product and how it works without having to visit a physical store. New technologies are being used to implement this process in various forms, such as virtual reality, virtual mirrors, and Taobao’s live sales broadcasts. JD.COM, TMALL.COM, and Thomas Pink all offer virtual fitting online. These new technologies help transfer the experiential attributes of products to online settings. Similarly, offline stores are catching up with these trends; for example, Tommy Hilfiger, Vancl, and Jack & Jones have used virtual mirrors for new product promotions. Using such technologies offline can not only reduce the time consumers spend inspecting products but also increase offline retailers’ profits. In addition to passively accepting retailer-provided product information, consumers actively search for information, often in a cross-channel manner. For example, Google (2016) reported that 82% of consumers visit an online stores to assess products but then buying offline (webrooming). Furthermore, CSA (2019) found that 57% of consumers begin by researching products in stores and then complete their purchases online (showrooming). Therefore, a question arises: Do online and offline retailers sufficiently engage in product-information disclosure to consumers when showrooming or webrooming behaviors may exist?.

To investigate this question, we examined, in a duopoly setting, online and offline retailers’ investment in easing customer product evaluation and how that interacts with showrooming or webrooming behaviors. The model is outlined as follows: A traditional and an online retailer sell an identical good with a digital attribute (e.g., appearance) and an experiential attribute (e.g., functionality) (Lal and Sarvary, 1999). Customers have heterogeneous preferences for quality. Moreover, the information available to consumers in different channels is not the same: consumers only obtain the product’s digital attributes online while offline they obtain both digital and experiential attributes. Online and offline retailers have two options: proactively disclose product information or wait for consumers to actively search for it. When making decisions about information disclosure, online retailers must weigh increased demand against losses generated by webrooming behavior. However, if showrooming behavior occurs, it does not matter whether the online retailer decides to disclose information. Similarly, offline retailers must consider the implications of information disclosure.

Using a game-theory approach, we found the following: first, when webrooming exists, the online retailer adopts an information-disclosure strategy, while the offline retailer may or may not disclose information. Whether the offline retailer discloses information depends on the following factors: hassle cost, travel cost, degree of investment, and investment cost. Second, in the case of information disclosure by the offline retailer, when investment cost is low, equilibrium profit increases with information-disclosure investment; however, when investment cost is high, the offline retailer’s equilibrium profit first increases and then decreases.

The current study is related to the literature on quality disclosure. The early literature on uncertainty mainly focused on retailers’ strategies, informative advertising (Butters, 1977, Rajiv et al., 2002, Soberman, 2004, Villas-Boas, 2004, Bass et al., 2005, Iyer et al., 2005, Anderson and Renault, 2009, Guo and Zhao, 2009), money-back guarantees (Davis et al., 1995, Messinger and Qiu, 2007), product returns (Davis et al., 1995, Huang and Jin, 2020, Ma et al., 2020), warranties (Soberman, 2003), and marketing activities (Gu and Xie, 2013). Kuksov and Lin (2010), meanwhile, highlighted free riding in a firm’s provision of preference-revealing information. Kuksov and Xie (2010) examined postpurchase efforts to affect consumer information acquisition. Jing (2015) suggested that in the absence of firm intervention, customers incur costs to evaluate products.

Different from these studies, the present research considered whether consumers are uncertain about product quality, which is determined by the choice of channels. If a consumer visits an online store first, he or she will not fully grasp product quality, however, if the consumer visits an offline store first, he or she will grasp the overall product quality. Moreover, the effects of online and offline retailers’ decisions to disclose information are different. An online retailer’s investment in product information disclosure will partly resolve consumer uncertainty and reduce travel costs for consumers who adopt webrooming behavior. Meanwhile, information disclosure by offline retailers only reduces consumers’ product matching costs or learning costs (or travel costs).

This study also pertains to the literature on cross-channel information free riding–that is, showrooming or webrooming. Most existing research has studied the effects of showrooming or webrooming (Balakrishnan et al., 2014, Jing, 2018), as well as strategies adopted under the assumptions of negative impact, increasing channels (Balakrishnan et al., 2014, Jing, 2018), price matching, exclusive products (Mehra et al., 2017), and return strategies (Jing, 2018). In these studies, consumers rely on their own searches to resolve uncertainty. The present model, meanwhile, investigated the interaction between retailers’ active disclosure and consumers’ active searching in a competitive environment.

The rest of this article is organized as follows: The next section lays out the model setup. The analysis and results of the model are presented in Section 3. Based on the model results, the optimal information-disclosure decisions are then proposed. The final section concludes with managerial implications.

Section snippets

Model

Consider a duopoly comprising offline retailer T and purely online retailer E, both of which carry an identical product (Jing, 2018). The product has a digital-attribute quality and an experiential-attribute quality (Lal and Sarvary, 1999). Without loss of generality, we assume that the marginal costs of the online and offline retailers are the same and are zero (Guan and Chen, 2017). We assume there is one unit of consumer in the market, and each consumer will consume one unit of product.

Analysis

This study’s model involves a multistage game process that uses backward induction to find the equilibrium solution. In what follows, we first consider a basic model in which neither the online nor offline retailer adopts information disclosure or reduces consumer travel costs. Then, we consider separately scenarios in which only the online retailer invests in information disclosure and only the offline retailer invests in information disclosure. Finally, we consider a case in which the online

Optimal Information-Disclosure Decision

By comparing the equilibrium profits in the above cases, we can obtain the subgame perfect equilibrium (SPE) as follows:

Proposition 3

In a competitive environment,

(3.1) information disclosure by neither the online nor offline retailer $(N, N)$ is an SPE if it conforms to one of the following conditions: (i) $s < q < h + s, \frac{s (h + 2 q)}{9 q} < β < \frac{s [2 (h + 2 q) - s]}{9 q}$ , and $k_{2}^{*} < k_{2} < 1 - \frac{q - h}{2 s}$ , (ii) $0 < s < q, 0 < h < q, β > \frac{s [2 (h + 2 q) - s]}{9 q}$ , and $k_{2}^{*} < k_{2} < \frac{1}{2}$ .

(3.2) If the online retailer does not invest in information disclosure while the offline retailer does

Conclusion

In this era of rapid technological development, consumers actively collect information across channels, while retailers actively provide information. This study focused on whether a contradiction exists between the two. In a duopoly market consisting of an offline retailer and an online retailer, we studied the interaction between retailer information disclosure and showrooming or webrooming. Information disclosure by online retailers has two functions: it gives online consumers part of the

CRediT authorship contribution statement

Zhanqing Wang: Conceptualization, Methodology, Writing - original draft. Lun Ran: Visualization, Supervision, Project administration. Defeng Yang: Resources, Formal analysis, Writing - review & editing, Funding acquisition.

Declaration of Competing Interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

Acknowledgement

The authors thank editors and anonymous reviewers for their valuable suggestions that have significantly improved this study. This work was supported by the Key Project of the Major Research Plan of the National Natural Science Foundation of China [grant number 91746210]; the National Natural Science Foundation of China [grant numbers 71872073, 71472074]; the Fundamental Research Funds for the Central Universities [grant number 19JNYH02]; and Enterprise Transformation Research Team Project of

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^☆: The three authors contribute equally to this article.

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Interplay between quality disclosure and cross-channel free riding☆

Highlights

Abstract

Introduction

Section snippets

Model

Analysis

Optimal Information-Disclosure Decision

Conclusion

CRediT authorship contribution statement

Declaration of Competing Interest

Acknowledgement

J. Retail.

Comparative advertising: disclosing horizontal match information

RAND J. Econ.

Browse-and-switch: Retail-online competition under value uncertainty

Prod. Oper. Manage.

Generic and brand advertising strategies in a dynamic duopoly

Market. Sci.

Facilitating fit revelation in the competitive market

Manage. Sci.

The interplay between information acquisition and quality disclosure

Prod. Oper. Manage.

Voluntary quality disclosure and market interaction

Market. Sci.

Impact of buy-online-and-return-in-store service on omnichannel retailing: a supply chain competitive perspective

Electron. Commer. Res. Appl.

The targeting of advertising

Market. Sci.

Lowering customer evaluation costs, product differentiation, and price competition

Market. Sci.