Market Structure and the Diffusion of E-Commerce : Evidence from the Retail Banking Industry

This paper studies the effect of market structure on the diffusion of e-commerce technologies. These include self-serve electronic check-in/-out kiosks, online retail outlets, online customer-service centers, and e-banking, which reduce costs for firms relative to their old, non-electronic (offline) technology. The full benefits for firms of these technologies, however, accrue only once consumers begin to perform a significant share of their transactions using electronic options. Since learning costs are involved in the adoption of the new technology, firms may try to encourage consumers to switch to the electronic option by manipulating the relative quality of the two options. We argue that their ability to do so is a function of market structure. In more competitive markets, reducing the relative attractiveness of the offline option involves the risk of losing customers (or potential customers) to competitors, whereas this is less of a concern for a more dominant firm. We study this issue in the context of the retail banking industry. Using household survey data on banking habits, as well as data on branch-locations, we find that households respond to branch closures by adopting and using e-banking more intensively. We show that a banks ability to close branches, and therefore gain from this consumer response, depends on market structure