Browse-and-Switch: Retail-Online Competition under Value Uncertainty

Although online shopping is becoming popular, consumers who are unsure about whether to buy a product may find it advantageous to visit a brick-and-mortar retail store to first examine the product before purchasing it. But, after browsing at the store, consumers have the option of switching to an e-tailer to purchase the item at a cheaper price rather than buying at the store. Recent business press refers to this browse-and-switch behavior as "showrooming," and attributes to it the declining profits of brick-and-mortar retailers. To study the effect of the browse-and-switch option on retail and online pricing strategies and profits, we analyze a stylized economic model that incorporates uncertainty in consumers' valuation of the product, captures the heterogeneity among consumers in their inclination to purchase online, and permits product returns. We consider various equilibrium scenarios for different combinations of consumer shopping behaviors, characterize the parameter ranges for each scenario, and demonstrate that browse-and-switch behavior can indeed occur under equilibrium. Our analysis further shows that the option for consumers to browse-and-switch intensifies competition, reducing the profits for both firms.