Consumer Showrooming, the Sunk Cost Effect and Online-Offline Competition


Ting Zhang
Ling Ge
Qinglong Gou
Liwen Chen


This paper studies price competition between the online and offline channels under the effects of showrooming and the sunk cost effect. Consumers who are uncertain about their product valuation might examine the product in a physical store but then switch to buying from the online store at a lower price (i.e., showrooming). We consider the sunk cost effect in a setup involving two competing stores -- online vs. physical -- and consumers that have valuation uncertainty and heterogeneous preferences about visiting the physical store. Our results suggest that the online store may be better off if it targets only one type of consumer -- either direct buyers or switchers, but not both. However, the online store can only do so under strict conditions, so it is more likely to engage in fierce price competition with the physical store to pursue switchers. We also find that high transportation cost may benefit both stores in most circumstances, but more so for the physical store because of the sunk cost effect. Higher sunk cost effect allows both stores to charge higher prices in certain circumstances. In sum, while showrooming is more likely to aggravate the competition, the sunk cost effect might mitigate the competition, benefiting both stores.

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February, 2018

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