The Alibaba Effect : Spatial Consumption Inequality and the Welfare Gains from e-Commerce

Domestic trade costs imply more restricted access to consumption goods in small and remote cities. By eliminating the fixed costs of firm entry and reducing the effects of distance on trade costs, e-commerce can disproportionately improve these cities' access to varieties of consumption goods and reduce the spatial inequality in living standards. The implication of this hypothesis is that residents in small and remote cities purchase more intensively online. Using unique data from China's leading e-commerce platform, we show that online expenditure share is negatively correlated with population and market potential. We then build a multi-region general equilibrium model to quantify the impacts of e-commerce on domestic trade and welfare. We find that although the emergence of e-commerce partially crowds out inter-city trade originally taking place offline, the aggregate domestic trade increases in net. The welfare gains from e-commerce are 1.6% on average, and are 30% larger for cities in the smallest quintile of population and market potential