Friend or foe? Examining local service sharing between offline stores and e-tailers

Local Service Sharing (LSS), a cooperation program between e-tailers and their rival offline retailers, provides customers with the convenience of buying online and receiving services in-store. Regarded as an effective means to integrate online sales and offline after-sales services, LSS helps e-tailers overcome their inherent weaknesses in capabilities of physical service provision. Although LSS deprives offline stores' competitiveness in services and causes the demand encroachment by e-tailers, offline stores under LSS benefit from the in-store online consumer traffic in the "online-to-offline"spillover and the service fees. This research investigates the optimal LSS adoption strategy of e-tailers and offline stores. We develop a stylized model where an e-tailer competes against an offline store for a unit mass of consumers who are heterogeneous in their geographic locations. Crucially, for the competing online and offline channels, we unveil that LSS generates the competition-mitigating effect (LSS can alleviate the price competition between retailers), the demand-shift effect (LSS results in an "offline-to-online"demand migration), and the strategic-channel effect (LSS lowers the offline channel's wholesale price but can increase the online channel's wholesale price). Overall, based on these effects, LSS can lead to a Pareto improvement for the e-tailer and the offline store. Interestingly, we show that under LSS, although a smaller offline market base leads to fewer in-store online consumers, it softens the price competition because the cross-channel competition is confined to a smaller consumer base, which benefits both retailers' profits. By comparing the benchmark and LSS results, we reveal that under certain conditions, LSS can improve the in-store service level and benefit the profit of the online channel's supplier. However, LSS always hurts the profit of the offline channel's supplier. In addition, LSS can be beneficial to consumer surplus.