Optimal demand shaping for a dual-channel retailer under growing e-commerce adoption

The e-commerce adoption level within our society has been growing in the past decade, leading to dynamically evolving demand patterns across retailing channels. In this work, we study a dual-channel retailer’s optimal demand shaping strategy, through e-commerce marketing efforts and store service levels, in the presence of this dynamic evolution. Our stylized model integrates the growing adoption of e-commerce within society with individual consumers’ channel choice, and explicitly models the reference effects of the retailer’s prior decisions on consumer decision-making in a multi-period setting. This model allows us to characterize the settings in which e-commerce marketing is beneficial for the retailer, and to show that the retailer’s optimal demand shaping strategy depends on the product’s e-commerce adoption phase. Interestingly, we find that if the retailer provides the consumers with information on store availability levels, then the retailer’s optimal service levels stay constant over time, even if e-commerce adoption in the society grows.