The Rise of E-Commerce and Retail Apocalypse

Abstract

The location of retail establishments in space is a critical decision for firms in the retail market. The rise of e-commerce in recent years has led to the displacement of many offline stores, but the precise mechanisms by which this affects the equilibrium number of stores are not well understood. In this paper, I investigate the direct effect of the rise of e-commerce on the closure of retail branches, as well as its indirect propagation through agglomeration and congestion forces within the retail landscape. To do so, I develop a demand and supply model that accounts for spillovers and unifies various agglomeration and congestion forces discussed in the literature. By examining variations in retailers’ exposure to online competition, I disentangle the spillover forces affecting demand and supply. My estimation results demonstrate that agglomeration and congestion forces both exist and are of comparable quantitative importance. Moreover, I show that by combining observed data with spillover parameters, we can separate the direct and indirect effects of e-commerce on the equilibrium store landscape. I analyze the welfare implications of this shift for both consumer welfare and retailer surplus.

Keywords: Ecommerce, Branching, Shift-Share Design

JEL Classification: L0, R0