IDEAS home Printed from https://ideas.repec.org/p/acb/cbeeco/2014-619.html
   My bibliography  Save this paper

On firm choice between online and physical markets

Author

Listed:
  • Yijuan Chen
  • Xiangting Hu
  • Sanxi Li

Abstract

Consumers buying goods online often cannot physically inspect the products prior to purchase. Thus an online market may turn what is usually regarded as a search good into an experience good. We investigate how this feature, together with other features of the marketplace, affects a firms choice between online and physical markets. Using a simple yet flexible framework, we show that the choice of a marketplace can be used to disclose or hide product quality. If the production cost is convex with respect to quality, the firm's choice will be characterized by a cutoff quality level, below which the firm will choose the online market, and above which the firm will choose the physical market. However, if the production cost of quality is concave, there are situations where the highest qualities pool with the lowest ones in the online market, leaving the physical market to intermediate qualities.

Suggested Citation

  • Yijuan Chen & Xiangting Hu & Sanxi Li, 2014. "On firm choice between online and physical markets," ANU Working Papers in Economics and Econometrics 2014-619, Australian National University, College of Business and Economics, School of Economics.
    • Handle: RePEc:acb:cbeeco:2014-619
    as

    Download full text from publisher

    File URL: https://www.cbe.anu.edu.au/researchpapers/econ/wp619.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ginger Zhe Jin & Andrew Kato, 2007. "Dividing Online and Offline: A Case Study," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(3), pages 981-1004.
    2. Grossman, S J & Hart, O D, 1980. "Disclosure Laws and Takeover Bids," Journal of Finance, American Finance Association, vol. 35(2), pages 323-334, May.
    3. Boyan Jovanovic, 1982. "Truthful Disclosure of Information," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 36-44, Spring.
    4. Paul Milgrom, 2008. "What the Seller Won't Tell You: Persuasion and Disclosure in Markets," Journal of Economic Perspectives, American Economic Association, vol. 22(2), pages 115-131, Spring.
    5. Luís Cabral & Ali Hortaçsu, 2010. "The Dynamics Of Seller Reputation: Evidence From Ebay," Journal of Industrial Economics, Wiley Blackwell, vol. 58(1), pages 54-78, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Weisstein, Fei L. & Song, Lei & Andersen, Peter & Zhu, Ying, 2017. "Examining impacts of negative reviews and purchase goals on consumer purchase decision," Journal of Retailing and Consumer Services, Elsevier, vol. 39(C), pages 201-207.
    2. Wang, Qi & Zhang, Chunyu & Ding, Yi & Xydis, George & Wang, Jianhui & Østergaard, Jacob, 2015. "Review of real-time electricity markets for integrating Distributed Energy Resources and Demand Response," Applied Energy, Elsevier, vol. 138(C), pages 695-706.
    3. Mittal, Sheetal & Chawla, Deepak & Sondhi, Neena, 2016. "Segmentation of impulse buyers in an emerging market – An exploratory study," Journal of Retailing and Consumer Services, Elsevier, vol. 33(C), pages 53-61.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chen, Pu & Chen, Yijuan & Hu, Xiangting & Li, Sanxi, 2015. "Can online markets attract high-quality products?," Economic Modelling, Elsevier, vol. 51(C), pages 65-71.
    2. Chen, Yijuan & Hu, Xiangting & Li, Sanxi, 2017. "Quality differentiation and firms’ choices between online and physical markets," International Journal of Industrial Organization, Elsevier, vol. 52(C), pages 96-132.
    3. Li, Sanxi & Peitz, Martin & Zhao, Xiaojian, 2016. "Information disclosure and consumer awareness," Journal of Economic Behavior & Organization, Elsevier, vol. 128(C), pages 209-230.
    4. Yijuan Chen & Xiangting Hu & Sanxi Li, 2014. "Quality differentiation and entry choice between online and offline markets," ANU Working Papers in Economics and Econometrics 2014-620, Australian National University, College of Business and Economics, School of Economics.
    5. Rroshi, Daniela & Weichselbaumer, Michael, 2021. "What is in a price? Evidence on quality signaling for experience goods," Department of Economics Working Paper Series 311, WU Vienna University of Economics and Business.
    6. Xu Guan & Yulan Wang & Zelong Yi & Ying‐Ju Chen, 2020. "Inducing Consumer Online Reviews Via Disclosure," Production and Operations Management, Production and Operations Management Society, vol. 29(8), pages 1956-1971, August.
    7. Koessler, Frederic & Skreta, Vasiliki, 2019. "Selling with evidence," Theoretical Economics, Econometric Society, vol. 14(2), May.
    8. Xu Jiang & Ying Xue, 2023. "Morale, performance and disclosure," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(1), pages 5-23, February.
    9. Levent Celik, 2014. "Information Unraveling Revisited: Disclosure of Horizontal Attributes," Journal of Industrial Economics, Wiley Blackwell, vol. 62(1), pages 113-136, March.
    10. Klein, T.J. & Lambertz, C. & Spagnalo, G. & Stahl, K.O., 2009. "The actual structure of eBay’s feedback mechanism and early evidence on the effect of recent changes," Other publications TiSEM b4c7374f-b992-445a-b5c6-8, Tilburg University, School of Economics and Management.
    11. Paul Milgrom, 2008. "What the Seller Won't Tell You: Persuasion and Disclosure in Markets," Journal of Economic Perspectives, American Economic Association, vol. 22(2), pages 115-131, Spring.
    12. Heifetz Aviad & Meier Martin & Schipper Burkhard C., 2021. "Prudent Rationalizability in Generalized Extensive-form Games with Unawareness," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 21(2), pages 525-556, June.
    13. Benndorf, Volker & Kübler, Dorothea & Normann, Hans-Theo, 2015. "Privacy concerns, voluntary disclosure of information, and unraveling: An experiment," European Economic Review, Elsevier, vol. 75(C), pages 43-59.
    14. Arrunada, Benito, 1999. "The provision of non-audit services by auditors let the market evolve and decide," International Review of Law and Economics, Elsevier, vol. 19(4), pages 513-531, December.
    15. Bertomeu, Jeremy & Marinovic, Iván & Terry, Stephen J. & Varas, Felipe, 2022. "The dynamics of concealment," Journal of Financial Economics, Elsevier, vol. 143(1), pages 227-246.
    16. Monteiro, Paulo Klinger & Moraga-González, José Luis, 2003. "We Sold a Million Units -- The Role of Advertising Past-Sales," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 57(2), April.
    17. Liang Guo, 2009. "Quality Disclosure Formats in a Distribution Channel," Management Science, INFORMS, vol. 55(9), pages 1513-1526, September.
    18. Ganesh Iyer & Shubhranshu Singh, 2022. "Persuasion Contest: Disclosing Own and Rival Information," Marketing Science, INFORMS, vol. 41(4), pages 682-709, July.
    19. Jesal Sheth, 2019. "Disclosure of information under competition: An experimental study," Discussion Papers 2019-04, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    20. Liran Einav & Chiara Farronato & Jonathan Levin, 2016. "Peer-to-Peer Markets," Annual Review of Economics, Annual Reviews, vol. 8(1), pages 615-635, October.

    More about this item

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:acb:cbeeco:2014-619. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/feanuau.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.