Demand-enhancing services for tangible products in a distribution system with online and off-line channels

Abstract

While it is well established that travel costs impact on customer preference toward local service providers, research about how this situation affects competitive marketing strategies remains sparse. This article investigates, in a local market with two competing service providers, whether service providers should undertake defensive marketing (DM), targeted at the nearest customers who typically prefer their offering for convenience and/or offensive marketing, directed to relatively remote customers who favor the rival as the closest alternative. We find that the service providers can exclusively undertake either DM or offensive marketing or combine the two in a full differentiated strategy at the equilibrium. We compare the outcomes of these three strategic options to identify the conditions under which they are worth implementing. Main findings suggest that service providers are better off undertaking offensive marketing alone when their rival’s retaliatory offensive capacity is weak and customers incur small travel costs. Otherwise, service providers may exclusively undertake DM or combine it with offensive marketing when travel costs become significant. Also, service providers should not invest in any marketing activity when they have no market power, like in the case of two adjacent outlets in a mall. Finally, the implications of these findings are discussed.