The Effects of BOPS Cooperation on Advertising and Pricing Decisions in Omnichannel Retailing

Many retailers start to implement the practice of buy online and pick up in store (BOPS) by integrating their online and offline channels. In this paper, we study the effects of BOPS cooperation (i.e., channel cooperation) in the presence of advertising competition. We first investigate how BOPS cooperation affects online and offline retailers’ advertising levels, prices, demands and profits under fixed and optimized pricing strategies and further explore the conditions under which retailers decide to implement BOPS cooperation for greater benefits. Next, we conduct a comparative study of the two pricing strategies before and after BOPS cooperation, examine the impact of different pricing strategies on advertising levels, and assess retailers’ preferences for the two pricing strategies. We also perform numerical examinations to derive insights into when BOPS cooperation is most appropriate and what advertising and pricing strategies are optimal for retailers. The numerical results show that implementing BOPS cooperation is not necessarily optimal for online and offline retailers and that the offline hassle cost, commission level and convenience coefficient in BOPS are the major determinants of retailers’ profitability. We also find that the BOPS convenience coefficient can be a partial compensation for the competitive effect of advertising in the optimized pricing strategy. In addition, we identify conditions under which retailers are better off in different cases. In particular, we find that when BOPS commission is high and offline hassle cost is low, online and offline retailers can benefit more from the optimized pricing strategy.