We’re only a few weeks from the birth of our first child and my wife and I are concerned about slipping into middle age already. The thought of us still listening to the same music collection we had 5 or 10 years ago led to a new year’s resolution: we will buy a new CD every week for a year.
This resolution prompted us to buy a new hi-fi. For a man who hates shopping and does most of it online (or via my wonderful wife), I wondered how I should buy a new hi-fi. It seems that I should “audition” a new hi-fi in the same way that you test drive a new car. But when I come to buy it, I could probably find myself a big discount by buying online.
This generates an economic problem. These cheaper online retailers free ride on physical stores that provide good customer service, product advice and the ability to try before you buy. Because of all this costs money, online stores can undercut physical stores. The free rider label comes from the idea of a person riding public transport without a ticket.
A prime example of this was a 2009 advert by dixons.co.uk that invited customers to try out the products elsewhere before visiting their online store for the lowest prices.
If this problem persists, physical stores could go out of business and, in extremis, the entire market may collapse as customers refuse to buy online without “test driving” the products first.
There seem to be two solutions. First, physical shops could make money not by selling goods but from pre sales customer service or independent advice. Rather like a personal shopper they could charge for advising you on your planned purchase.
Second, brands could own high street shops to showcase their products but with little intention of selling them direct to customers. The cost of this is passed on to all retailers in the wholesale price therefore leveling the playing field.
Apple is a good example of this. In every major city there is a big, shiny Apple store showcasing their products and offer pre and post sales service. However, they carry very little stock and most customers buy online either directly from Apple or from other retailers.
In the “old days” manufacturers used to assign geographic territories to dealers thereby guaranteeing them a local monopoly which allowed them to recover the high cost of the physical outlet. In the internet age geography is meaningless.