Outlet location, price and quality

Operating through outlet channel is a widespread retail strategy that provides deep discounts in stores that are located far away from the shopping districts of major metropolitan areas. These stores play an important role in the retailing and fashion industry. In this paper, we use an analytical model to investigate the role of outlet stores in segmenting the markets based on the two dimensions of consumer’s heterogeneity; namely sensitivity to travel and taste for product quality. We show how the relative heterogeneity in these two dimensions can result in different adoption strategy of outlets. We identify the optimal price and quality levels of products under each outlet adoption strategy. We also provide a rationale for the strategy of firms in choosing an outlet location in close proximity to their regular stores.