Buy Online, Pick Up, or Deliver from Store: Why Would an Online Retail Platform with Third-Party Sellers Offer It?

We examine a platform’s omnichannel experiment that enables consumers who purchase on the platform to either pick up products at third-party sellers’ offline stores or have them delivered by those sellers—a practice known as local selling. It is unclear why the platform would voluntarily forgo fulfillment-related profits by allowing third-party sellers, who already operate on the platform, to fulfill consumer orders. We provide insights into how local selling affects the platform, sellers, and consumers using a game-theoretic model in which competing third-party sellers offer products on the platform. We find that the platform indeed enjoys a higher profit under local selling than under traditional online selling under some conditions, despite the loss of fulfillment profits, because the platform may enjoy more sales commission from softened price competition between sellers. From the sellers’ perspective, traditional online selling masks the underlying heterogeneity of consumers’ locations, making sellers undifferentiated on the location dimension. In contrast, local selling exposes consumers’ location heterogeneity, enabling sellers to exploit the inherent location differentiation to alleviate price competition between them. More importantly, we find that local selling may not always alleviate price competition despite exposing location differentiation among consumers. The extent to which local selling exposes the location differentiation to sellers and reduces price competition depends critically on product and market characteristics. Although local selling always benefits sellers, consumers do not necessarily benefit from it despite their enhanced ability to make a rational fulfillment choice. Thus, the local selling strategy could be a way for the platform and sellers to benefit at the expense of consumers.

History: Param Singh, Senior Editor; Hong Xu, Associate Editor.