Pricing and Assortment Decision of Competitive Omnichannel Selling Strategy: Considering Online Return Cost

In the age of new retailing, consumers are discovering brands in new ways and seeking new conveniences to guide their purchasing decisions. Increasingly, retailers are offering consumers a cohesive and comprehensive experience across digital and physical touchpoints by integrating online and offline channels. This study considers a competitive market structure with two retailers selling four products via both online and offline channels. The retailers act as the decision maker of both the product assortment strategy and pricing strategy. Consumers are heterogenous in their horizontal fitness regarding each product, while they are common in the return probability when facing a deceptive product. Consumers’ purchase decision of whether to purchase through physical stores or online stores and making a purchase from which retailers depend on not only the product assortment strategies across competitive retailers but also the return cost that the consumers are faced with if product return happens. Results show that the online product return cost plays an important role in the retailers’ optimal pricing strategy design and product assortment strategy design. To be specific, the optimal prices of products that are sold through the online channel first increase in the return cost of the online product and then decrease it; while the optimal prices of products sold offline are always increasing in the online product return cost. Moreover, no matter what placement strategy sellers will choose, the optimal profit of both sellers is first decreasing the return cost of the online product and then increasing it. Our analyses also depict a two-dimensional market structure by considering sellers’ return costs and consumers’ misfit costs to investigate the optimal selling strategies under the cross-channel shopping platform.