Online selling through O2O platform or on your own? Strategic implications for local Brick-and-Mortar stores

Local brick-and-mortar (B&M) retail stores have traditionally served customers only in a proximal geographic area with their existing operations from a physical store. Emerging online-to-offline (O2O) third-party platforms allow the local B&M stores to increase their consumer base by offering online ordering and delivery services (which we refer to as platform mode). To implement online retailing, a store can also choose to build all the online retail and delivery capabilities by itself (self-building mode), or outsource order-taking to the third-party platform but provide self-built delivery service to customers (mixed mode). We analytically investigate when a local B&M store should adopt an O2O strategy, and the conditions under which each of the three modes is optimal. We show that a store should implement the O2O strategy only when the market is partially covered, or when the market is fully covered and the store's delivery cost is sufficiently low. We fully characterize the optimal mode of operations based on the delivery cost threshold. Interestingly, we find that the self-building and mixed modes dominate the platform mode when the store offers uniform pricing for both online and B&M store customers. We also propose a novel cooperation mechanism that can improve both the platform's and the local B&M store's profits. Additionally, with the proposed cooperation mechanism, the platform mode dominates the mixed mode.