In an environment where consumers' rising valuation of Instagrammable memories drives their spending from products to experiences, retailers start offering innovative experiences to attract consumers to their stores. Although experiential stores may attract many consumers, it is not obvious if retailers can benefit from such crowds to raise their profits. Further, welfare implications of these experiences for consumers are not clear in both monopoly and competitive settings. In this research, we investigate pricing and welfare implications of experiences that are being offered in today's retail locations. As such, our paper sheds light on the conditions under which experiential retailing can be beneficial both for retailers and for consumers.
We use a random utility consumer choice model to model consumer preferences in monopoly and duopoly settings. For the latter, where retailers compete with experiences along with main product prices, we pose a game theoretic model to analyze the equilibrium prices, profits, and consumer welfare. We provide both structural results and managerial insights via a unified approach that tackles various problem settings. We show that high quality experiences can be detrimental for retailers and/or consumers due to high prices and a large number of consumers who visit the retailer solely for the experience (i.e., free-riders). In an environment where experiential retailing is the mainstream practice among retailers, both retailers and consumers can benefit from this approach. Otherwise, when only a single retailer adopts this approach, experiences have the potential to benefit solely the competing retailer.
Dr. Nevin Mutlu is an Assistant Professor and Marie Sklodowska-Curie research fellow in the School of Industrial Engineering at Eindhoven University of Technology, The Netherlands. She received her Bachelor’s and PhD degrees from University at Buffalo and Virginia Tech, respectively. Her research interests include retail operations, revenue management, and logistics. She is the recipient of the prestigious EU Horizon 2020 Marie Sklodowska-Curie Individual Fellowship.
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