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

College of Management, Georgia Institute of Technology, Atlanta, Georgia 30308
Stern School of Business, New York University, New York, New York 10012
Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada
chris.forman{at}mgt.gatech.edu
aghose{at}stern.nyu.edu
agoldfarb{at}rotman.utoronto.ca

Our paper shows that the parameters in existing theoretical models of channel substitution such as offline transportation cost, online disutility cost, 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. In particular, 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.com on the top-selling books for 1,497 unique locations in the United States for 10 months ending in January 2006. We show that when a store opens locally, people substitute away from online purchasing, even controlling for product-specific preferences by location. These estimates are economically large, suggesting that the 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. However, we find no consistent evidence that the breadth of the product line at a local retail store affects purchases.

Key Words: channel substitution; theory testing; Internet retailing
History: Received: November 30, 2006;

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