Offline-Online Retail Collaboration Via Pickup Partnership

We study an increasingly popular retail practice called pickup partnership that allows online retailers to offer an in-store pickup service by partnering with a physical store. In practice, online retailers use two policies for such partnerships: (i) paying a fixed fee for each pickup order to the offline partner (fixed fee policy), or (ii) offering a coupon with each pickup order to customers to be redeemed at the offline partner's store (coupon policy). Our goal is to examine each policy and identify the best approach for online retailers to adopt in a pickup partnership. We develop a stylized model that captures the key features of a pickup partnership. We find that although the coupon policy allows the online retailer to gain greater market coverage compared to the fixed fee policy, it does not always increase the online retailer's profit. We characterize when an online retailer should establish a pickup partnership with an offline partner using the fixed fee versus the coupon policies. We also find that these two policies may entail inefficiencies when the incentives of the two parties are not aligned. To alleviate such inefficiencies, we prescribe a new policy that aims to align both parties' incentives. This paper provides the first theoretical analysis of the emerging business model of in-store pickup partnerships and serves as a prescription for online retailers who want to establish such partnerships. By proposing a new policy, it also strives to make pickup partnerships more efficient than current practices.