Contracts for online retailers considering consumer intra-product showrooming

Given the proliferation of platform retailing in recent years, there is a need to understand the conditions under which online retailers would adopt a revenue-sharing or fixed-fee contract. We consider a setting in which a manufacturer distributes a single product to consumers through two channels: an online intermediary marketplace operated by an online retailer and a manufacturer-owned brick-and-mortar store. This article focuses on studying the online retailer’s contract choice in the presence of intra-product showrooming. Our analysis shows that there is no dominating contract that the online retailer always prefers. We characterize the parameter ranges for each equilibrium scenario. Moreover, we investigate the effect of service cost on the online retailer’s and manufacturer’s profits and find that the online retailer’s profit is negatively affected by the costly service, whereas the manufacturer could benefit from service cost under certain conditions. Our analysis further reveals that the price is higher under a fixed-fee contract than under a revenue-sharing contract. We conclude that the online retailer can adjust the contract parameters appropriately to induce the desired service level and price, and the manufacturer can devise his strategies more effectively to enhance the overall profits. We also extend our framework to encompass richer functional form of the cost of service, differentiated channels, as well as offline shopping costs and online returns.