Competition in consumer shopping experience

Abstract

This paper analyzes the competitive role of retail shopping experience in markets with consumer search costs. We examine how a retailer's advantage in providing consumer shopping experience affects its equilibrium pricing and price advertising strategies. We find that if the consumer valuation of a shopping experience is sufficiently low, its effect on retailer strategy is similar to that of quality, and the retailer with the advantage in shopping experience then deploys higher levels of price advertising. On the other hand, when the shopping experience is valuable enough for consumers, it acts akin to price advertising in that it makes it optimal for the retailer with the advantage in shopping experience to eschew price advertising. The optimal competitive investments in consumer shopping experience can be higher than that of a monopoly. The profit impact of shopping experience for a retailer depends on the level of shopping experience: for low levels, the profit impact depends on the difference in the levels between the retailers, but for high enough levels, it depends only on whether the retailer's shopping experience level is higher than that of its competitor. In this case, even small differences in shopping experience levels can result in large differences in equilibrium profits. © 2012 INFORMS.