Competition between Local and Electronic Markets: How the benefit ofbuying online depends on where you live

We empirically examine the trade-off between the benefits of buyingonline and the benefits of buying in a local retail store. How does aconsumer’s physical location shape the relative benefits of buyingfrom the online world? We explore this problem using data from Amazon onthe top selling books for 1497 unique locations in the US for 10 monthsending in January 2006. In particular, we examine what happens when alarge bookstore opens and when a discount retailer opens. We show thateven controlling for productspecific preferences by location, changes inlocal retail options have substantial effects on online purchases. Whena store opens locally, we find evidence that people substitute away fromonline purchasing, demonstrating that consumers appear to respond toincreased convenience in the offline channel. These estimates areeconomically large, suggesting that disutility costs of purchasingonline are substantial and that offline transportation costs matter. Wealso show that offline entry decreases consumers’ sensitivity toonline price discounts. We find no consistent evidence that the breadthof the product line at a local retail store affects purchases althoughbreadth seems to matter in university towns and larger cities. Our papershows that the parameters in existing theoretical models of channelsubstitution such as offline transportation cost, online disutilitycost, market coverage, and the prices of online and offline retailersinteract to determine consumer choice of channels. In this way, ourresults provide empirical support for many such models.