We consider a duopoly market in which two retailers with different reputation
compete in prices and one of the retailers is considering selling through
a new channel. Consumers are reputation sensitive and averse to the new
channel. In addition, the reputation sensitivity and new channel aversion are
heterogeneous across consumers. In such a setting, we find that, there must
be some cost reduction for the good reputation retailer to have an incentive to
sell through a new channel unless consumers are sufficiently averse to the new
channel. The good reputation retailer may keep or withdraw its old channel
and may coexist with the bad reputation retailer or drive it out of the market,
depending on the combination of cost reduction and the degree of consumers’
aversion to the new channel. On the contrary, even if cost increases by a small
amount, the bad reputation retailer also has an incentive to sell through the
new channel. The bad reputation retailer always withdraws the old channel,
and it may coexist with the good reputation retailer or drive it out of the
market, depending on the cost difference between its two channels.