Gilles Reinhardt, Moren Lévesque


Firms retail an increasing proportion of their products on-line. How much to sell through the Internet is a decision driven by market consideration and supply chain efficiency. In this paper, we use micro-economics to derive a firm’s on-line and off-line quantity that best trade-offs costs, revenue, and competitive behavior. We study the case of a new firm which is a monopolist. We show that it may not be optimal for the firm to retail on both channels. Indeed, the firm must consider all costs in retailing its products. The model is then refined to study the case of a new entrant facing an already populated market that operates on one or both channels. To maximize profits it may be tempting for the new entrant to retail on-line if the incumbents are retailing on a bricks-and-mortar network, or vice-versa. We show that this decision depends almost solely on a product’s typology and the firm’s supply chain efficiency. We also observe a new competitive strategy in the proportion of output one firm sells on-line: as that proportion increases for the existing firms, it will decrease for the new entrant, and vice versa.

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August, 2004

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