Competition between Local and Electronic Markets: How the Benefit of Buying Online Depends on Where You Live

45 Pages Posted: 1 Nov 2006

See all articles by Chris Forman

Chris Forman

Cornell University - Dyson School of Applied Economics and Management; Georgia Institute of Technology - Scheller College of Business

Anindya Ghose

New York University (NYU) - Leonard N. Stern School of Business

Avi Goldfarb

University of Toronto - Rotman School of Management

Date Written: September 2007

Abstract

We empirically examine the trade-off between the benefits of buying online and the benefits of buying in a local retail store. How does a consumer's physical location shape the relative benefits of buying from the online world? We explore this problem using data from Amazon on the top selling books for 1497 unique locations in the US for 10 months ending in January 2006. In particular, we examine what happens when a large bookstore opens and when a discount retailer opens. We show that even controlling for product-specific preferences by location, changes in local retail options have substantial effects on online purchases. When a store opens locally, we find evidence that people substitute away from online purchasing, demonstrating that consumers appear to respond to increased convenience in the offline channel. These estimates are economically large, suggesting that disutility costs of purchasing online are substantial and that offline transportation costs matter. We also show that offline entry decreases consumers' sensitivity to online price discounts. We find no consistent evidence that the breadth of the product line at a local retail store affects purchases although breadth seems to matter in university towns and larger cities. Our paper shows that the parameters in existing theoretical models of channel substitution such as offline transportation cost, online disutility cost, market coverage, and the prices of online and offline retailers interact to determine consumer choice of channels. In this way, our results provide empirical support for many such models.

Keywords: internet, online retailing, location, channel substitution

JEL Classification: L86

Suggested Citation

Forman, Chris and Ghose, Anindya and Goldfarb, Avi, Competition between Local and Electronic Markets: How the Benefit of Buying Online Depends on Where You Live (September 2007). NET Institute Working Paper No. 06-15. Available at SSRN: https://ssrn.com/abstract=941175 or http://dx.doi.org/10.2139/ssrn.941175

Chris Forman (Contact Author)

Cornell University - Dyson School of Applied Economics and Management ( email )

Ithaca, NY
United States

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

Anindya Ghose

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

Avi Goldfarb

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-8604 (Phone)
416-978-5433 (Fax)

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