22 International Journal of E-Business Research, 4(1), 22-, January-March 2008 Copyright © 2008, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited. abstraCt An important strategic issue for managers planning to set up online stores is the choice of product categories to retail. While the “right” product category would depend on a number of factors, here we focus on the following two factors: compatibility of the product with the online channel, and the competition between the traditional brick and mortar channel and the online channel. This is to acknowledge two well-known facts: Certain products are more suitable for selling through the Web than through other channels; and an online retailer competes with not only other online retailers, but also traditional brick and mortar retailers. To determine the right product category, we develop a game theoretical model that allows for competition between the retailers. We study both Stackelberg and Bertrand competition models, as these two models capture the essence of different types of competition on the Web. Based on our results, we propose that, under all types of competition, the optimal product is one that is only moderately compatible with the Internet. Keywords: channel competition; game theory; online retailing; product strategies Product Choice strategy for online retailers Ruiliang Yan, Virginia State University, USA Amit Bhatnagar, University of Wisconsin-Milwaukee, USA iNtroDUCtioN There are a number of statistical reports, from the industry and the government, which show that commerce on the Internet is growing at a healthy rate. For instance, according to “The 2006 State of Retailing Online”, the ninth annual report published by Shop.org and conducted by Forrester Research, online retail sales are expected to hit $211.4 billion in 2006, a 20% gain over revenues of $176.4 billion in 2005. Again according to the Department of Com- merce, quarterly e-commerce sales in the third quarter of 2006 increased 20.4% from the third quarter of 2005. This growth in commerce on the Internet has attracted the attention of busi- ness managers, who now accept the Internet as a viable channel to distribute products to consumers. Managers who are planning to set up online stores need to make a number of strategic deci- sions, one of which is simply what product to sell. This can be a critical decision, because some products have a greater likelihood of succeeding on the Web. For instance, according to “The 2006 State of Retailing Online” report, the top- selling categories on the Internet are computer hardware and software ($16.8 billion); autos and auto parts ($15.9 billion); and apparel, acces- sories, and footwear ($13.8 billion). Cosmetics and fragrances ($800 million) and pet supplies IGI PUBLISHING This paper appears in the publication, International Journal of E-Business Research, Volume 4, Issue 1 edited by In Lee © 2008, IGI Global 701 E. Chocolate Avenue, Suite 200, Hershey PA 17033-1240, USA Tel: 717/533-8845; Fax 717/533-8661; URL-http://www.igi-global.com ITJ3978