Wednesday, October 21, 2015 | 2:00pm - 3:30pm | Room 329, HSBC Business School Building

Abstract

Big-box stores o er a broad selection of products and make it convenient for consumers to buy many of the products they need in just one store. On the other hand, specialty stores often focus on a speci c product category and provide exceptional customer service to help people evaluate the products. In this paper, we examine how store visit costs and consumer knowledge about a product a ect the strategic behavior of consumers and, in turn, the pricing, customer service and advertising decisions of competing retailers. Our analysis o ers insights on how specialty stores can compete with big-box retailers. We consider a market in which consumers incur a travel cost to visit a store and need a certain level of knowledge to assess the  t of a product. In our model, a specialty store selling a niche product competes with a big-box store selling both the niche product and a basket of staple goods. Consumers visit the big-box store  rst to enjoy the convenience of one-stop shopping. They visit the specialty store if they do not  nd a suitable product at the big-box store or if they need the customer service provided by the specialty store. Our analysis shows that even in the absence of any cost advantage or any di erence in utility distributions, the big-box store sells the niche product at a lower price than the competing specialty store. However, the price order can be reversed when the specialty store advertises its price. Furthermore, the specialty store advertises its price only when the distance between the stores is suciently large. On examining specialty store's pro ts, we  nd that locating the specialty store too close or too far from the big-box retailer hurts its pro ts. The optimal level of customer service provided by the specialty store decreases in distance when the distance between the two stores is small and increases when the distance is large. One might expect the specialty store to provide more customer service as the level of knowledge required to evaluate the niche product increases. Interestingly, we  nd that the optimal level of customer service could decrease in the knowledge level required to independently assess the product. Finally, the level of customer service provided at the specialty store could improve the big-box store's pro ts.