Real And Virtual Competition

Goods sold by electronic firms are not perfect substitutes for otherwise identical goods sold by their offline counterparts. Online purchases are associated with waiting costs, and they do not allow consumers to inspect the product prior to purchase. Visiting a conventional retailer, on the other hand, involves positive travelling costs. In this paper I extend the circular city model to include two types of firms, conventional and electronic. I show that under some parameter configurations, conventional stores actually raise their prices in response to entry of electronic firms. Moreover, economic welfare goes down.