Living Economics

Raiders of the Net
Controlling the distribution of products and the provision of after-sale service considerably reduce free riding of online shoppers on offline stores for product information.

In the last few years online stores have revolutionized retail shopping. There are two main reasons for this. First, the Internet is a storehouse of information for consumers, and second, comparison-shopping is just a few mouse clicks away. So goods that don't require "touch and feel" or need substantial product information and are shipped easily are better purchased online. Given that many such online stores do not collect sales tax and offer significant price discounts, many shoppers are tempted to visit some big department store to get 'first hand' product information and then shop online. But in doing so, customers are free-riding on the sales efforts of offline stores. In other words, customers have threatened to transform sales efforts (a private good) into a commons good.

Manufacturers share this concern, as they do not want retailers (who provide sales effort) to drop their products. One strategy is to restrict distribution of some products to websites of select offline stores and exclusive manufacturer websites. Figures from a survey conducted on 1,100 types of fragrances show that as much as 21% of perfumes are available exclusively on manufacturers' websites, and 19% on websites of large department stores. And the more exclusive a perfume is, the more controlled is the online distribution.

Secondly, for products that are widely available both online and offline, manufacturers have sought to address the problem by selectively choosing authorized distributors and by reserving the right not to honor warranties or returns from unauthorized sales. This allows the authorized stores to charge a price higher than others to cover after-sale maintenance or pre-sale information.

Big-box stores have since adopted counter-measures to blunt the onslaught from online retailers. Some match online prices to save customers the trouble of shopping online. Others offer more liberal returns policies to save customers the cost of returns. And because Amazon.com has started charging sales tax on online orders, the price spread between online and offline items has considerably narrowed.

Some manufacturers rent space within big-box stores to show-room their merchandise thus help to defray some of the showrooming cost otherwise borne by the stores. Apple even has its own showrooms/stores to showcase its products. In any case, the profusion of youtube product review videos and other text reviews has made it largely unnecessary to visit offline stores to get product information. This is especially true for low-traffic high-end items which offline stores do not usually carry (WSJ 4/5/2013).

Note:
  1. Updated: 3/12/2015.
  2. Updated: 3/12/2015.
References:
  • Borenstein, S. & Saloner, G. "Economics and Electronic Commerce," Journal of Economic Perspectives 15(1), Winter 2001: 3-12.
  • Carlton, D.W. & Chevalier, J.A. "Dealing with free riding on the Internet," National Bureau of Economic Research Working Paper No. W8067.
  • WSJ. 4/5/2013. "Has Best Buy Turned the Tide Against Showrooming?"
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