The Game Between Retailer and eTailer: Implications for Grocery Industry

With the advent of electronic commerce, it was expected that electronic retailers would replace conventional retailers. However, in industries such as grocery industry, electronic commerce itself is struggling and many e-tailers are dying out. Meanwhile, conventional retailers such as off-line travel agencies still seem to stay in business in the industries where dot-com companies are successful. What will be the evolutionary paths of different industries and what portion of the markets will conventional retailers be able to keep? Salop’s circular market model is extended to examine the direction of evolution with the advent of electronic commerce. We find that the evolution of an industry depends on the set of the demand and technology parameters. The etailer will be more successful in a less competitive and larger market. Even though the entry of e-tailer forces retailers to close their businesses, surviving retailers can enjoy greater market sales with more specialized products.