Online Retailing Channel Addition: Risk Alleviation or Risk Maker?

Abstract

The retailing industry traditionally considers the optimal products selection and pricing problem, a complex and challenging one, from marketing and consumer behavior's perspectives. In this study, we take a risk perspective and offer an alternative solution to tackling the problem, echoing the most recent literature that looks at non-risk aspects, such as expected consumer preference, market size and predicted profitability. Adopting a mean-variance framework, our approach explicitly takes into account the interconnectedness of retail products and their impact on risk at the portfolio (retailer) level. Extending the analysis to multiple-channel decisions, our results suggest that the introduction of a new retailing channel (e.g. online shops) can reduce the portfolio risk, whereas a lack of synergy between the new channel and the existing ones may lead to a negative impact on the overall performance. We also provide managerial implications on several conditions when retailers are more economically inclined to introduce more retail channels. Interestingly, our model indicates that larger retailers are less likely to expand their online platform.