Physical Showroom Deployment for Online Retailers under Asymmetric Competition: A Game-Theoretic Equilibrium Analysis

Abstract

Purely online channels are limited in conveying non-digital product attributes, such as fit, material, and usage experience, which creates product-fit uncertainty and utility loss for consumers. Physical showrooms can reduce such uncertainty, but consumers must incur hassle costs from travel, time, and store visits. This paper develops an asymmetric duopoly model with an incumbent online retailer and a market entrant, and compares four showroom deployment scenarios: NN, SN, NS, and SS. For each scenario, we derive equilibrium prices, demands, and profits, and characterize the showroom deployment equilibrium.The results show that showroom deployment is valuable only when the utility loss from online purchase exceeds the hassle cost of offline experience. In this case, showrooms can reshape demand allocation and competitive intensity. The incumbent may use showrooms to reinforce its first-mover advantage, while the entrant may use them for differentiated entry when platform recognition is sufficiently high. Moreover, mutual showroom deployment may arise as an equilibrium even when it lowers total industry profit, leading to a Prisoner’s Dilemma. These findings provide analytical insights for omnichannel deployment and pricing decisions by online retailers.