Measuring Welfare Gains from Online Stores:Theory and Evidence from the Supreme Court's Wayfair Decision

Abstract

We study how the rise of e-commerce has reshaped consumer welfare and its distributional implications in the presence of retail oligopoly. Based on new data on shopping receipts, we document consumer heterogeneity in online retailing markets: households living in rural areas and with higher incomes are more likely to shop online. To quantify the welfare effects, we leverage an exogenous tax shock by the Supreme Court's Wayfair Decision to learn about online store substitutability and firm pricing responses. We then develop and estimate a structural demand and supply model focussing on the pet food retail market. The model allows us to decompose the consumer online welfare gains into gains from varieties (9%) and convenience (5%) and gains from pro-competitive effects (3%). We further characterize the distributional effects of the rise of e-commerce and find it has reduced consumption inequality between rural and urban areas but increased consumption inequality between the rich and the poor.

Keywords: online shopping, spatial frictions, sales tax, consumer welfare

JEL Classification: L0, R0