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Geography and Electronic Commerce: Measuring Convenience, Selection, and Price

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Author Info

  • Chris Forman

    ()
    (Tepper School of Business)

  • Anindya Ghose

    ()
    (Stern School of Business, New York University)

  • Avi Goldfarb

    ()
    (Rotman School of Management, University of Toronto)

Abstract

We develop a formal model of online-offline retail channel substitution to identify three factors that drive consumers to purchase online: convenience, selection, and price. This model builds hypotheses on how features of offline retail supply impact online purchasing. We then examine how the local availability of offline retail options drives use of the online channel and consequently how the convenience, selection, and price advantages of the online channel may vary by geographic location. In particular, we examine the effect of local store openings on online book purchases in that location. We explore this problem using data from Amazon on the top selling books for 1501 unique locations in the US for 10 months ending in January 2006. In addition to this data, we use information on changes in local retail competition as measured by openings of large bookstores such as Borders or Barnes & Noble and discount stores such as Wal-Mart or Target. We show that even controlling for product-specific preferences by location, changes in local retail options have substantial effects on online purchases. We demonstrate how the convenience, selection, and price benefits of the Internet are different for consumers in different types of locations. More generally, we show that geography significantly impacts the benefit that consumers derive from electronic markets.

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Bibliographic Info

Paper provided by NET Institute in its series Working Papers with number 06-15.

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Length: 39 pages
Date of creation: Sep 2006
Date of revision: Sep 2006
Handle: RePEc:net:wpaper:0615

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Web page: http://www.NETinst.org/

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References

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  1. Patrick Bajari & Jeremy Fox & Stephen Ryan, 2008. "Evaluating wireless carrier consolidation using semiparametric demand estimation," Quantitative Marketing and Economics, Springer, vol. 6(4), pages 299-338, December.
  2. Eric K. Clemons & Il-Horn Hann & Lorin M. Hitt, 2002. "Price Dispersion and Differentiation in Online Travel: An Empirical Investigation," Management Science, INFORMS, vol. 48(4), pages 534-549, April.
  3. Chrysanthos Dellarocas, 2003. "The Digitization of Word of Mouth: Promise and Challenges of Online Feedback Mechanisms," Management Science, INFORMS, vol. 49(10), pages 1407-1424, October.
  4. Susan Athey & Scott Stern, 2002. "The Impact of Information Technology on Emergency Health Care Outcomes," RAND Journal of Economics, The RAND Corporation, vol. 33(3), pages 399-432, Autumn.
  5. Sridhar Balasubramanian, 1998. "Mail versus Mall: A Strategic Analysis of Competition between Direct Marketers and Conventional Retailers," Marketing Science, INFORMS, vol. 17(3), pages 181-195.
  6. Forman, Chris & Goldfarb, Avi & Greenstein, Shane, 2005. "How did location affect adoption of the commercial Internet? Global village vs. urban leadership," Journal of Urban Economics, Elsevier, vol. 58(3), pages 389-420, November.
  7. Sinai, Todd & Waldfogel, Joel, 2004. "Geography and the Internet: is the Internet a substitute or a complement for cities?," Journal of Urban Economics, Elsevier, vol. 56(1), pages 1-24, July.
  8. Bresnahan, T.F & Reiss, P.C., 1989. "Entry And Competition In Concentrated Markets," Papers 151, Stanford - Studies in Industry Economics.
  9. Anindya Ghose & Arun Sundararajan, 2006. "Evaluating Pricing Strategy Using e-Commerce Data: Evidence and Estimation Challenges," Papers math/0609170, arXiv.org.
  10. Glenn Ellison & Sara Fisher Ellison, 2006. "Internet Retail Demand: Taxes, Geography, and Online-Offline Competition," NBER Working Papers 12242, National Bureau of Economic Research, Inc.
  11. Nitin Mehta & Surendra Rajiv & Kannan Srinivasan, 2003. "Price Uncertainty and Consumer Search: A Structural Model of Consideration Set Formation," Marketing Science, INFORMS, vol. 22(1), pages 58-84, June.
  12. Bart J. Bronnenberg & Vijay Mahajan, 2001. "Unobserved Retailer Behavior in Multimarket Data: Joint Spatial Dependence in Market Shares and Promotion Variables," Marketing Science, INFORMS, vol. 20(3), pages 284-299, October.
  13. Rajiv Lal & Miklos Sarvary, 1999. "When and How Is the Internet Likely to Decrease Price Competition?," Marketing Science, INFORMS, vol. 18(4), pages 485-503.
  14. repec:reg:rpubli:300 is not listed on IDEAS
  15. Dellarocas, Chrysanthos, 2003. "The Digitization of Word-of-mouth: Promise and Challenges of Online Feedback Mechanisms," Working papers 4296-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  16. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, vol. 80(1), pages 123-129, July.
  17. Bronnenberg, B.J.J.A.M. & Mahajan, V., 2001. "Unobserved retailer behavior in multimarket data: Joint spatial dependence in market shares and promotion variables," Open Access publications from Tilburg University urn:nbn:nl:ui:12-332642, Tilburg University.
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Cited by:
  1. Emek Basker, 2007. "The Causes and Consequences of Wal-Mart's Growth," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 177-198, Summer.

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