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The impact of e-commerce: It always benefits consumers, but may reduce social welfare

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  • Nakayama, Yuji

Abstract

This paper investigates the impact of e-commerce on social welfare using a linear city model. Our model incorporates the diversity of consumers such that some can purchase the good via the Internet while others cannot. Our main result is as follows. The appearance of e-commerce enhances retail competition and always increases consumer surplus. However, total surplus does not necessarily improve. This is because the equilibrium market division between conventional stores and e-commerce is not socially optimal and efficiency loss of distribution accrues if the population of Internet shoppers is small and/or the cost of e-commerce is high. Our theoretical results indicate that the small e-commerce market share in the Japanese and US economies may result in welfare loss.

Suggested Citation

  • Nakayama, Yuji, 2009. "The impact of e-commerce: It always benefits consumers, but may reduce social welfare," Japan and the World Economy, Elsevier, vol. 21(3), pages 239-247, August.
  • Handle: RePEc:eee:japwor:v:21:y:2009:i:3:p:239-247
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    References listed on IDEAS

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    1. Zhao, Jingang, 2001. "A characterization for the negative welfare effects of cost reduction in Cournot oligopoly," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 455-469, March.
    2. Bouckaert, Jan, 2000. "Monopolistic competition with a mail order business," Economics Letters, Elsevier, vol. 66(3), pages 303-310, March.
    3. Wei-yu Kevin Chiang & Dilip Chhajed & James D. Hess, 2003. "Direct Marketing, Indirect Profits: A Strategic Analysis of Dual-Channel Supply-Chain Design," Management Science, INFORMS, vol. 49(1), pages 1-20, January.
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    5. repec:ebl:ecbull:v:12:y:2007:i:31:p:1-8 is not listed on IDEAS
    6. 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.
    7. Michael R. Baye & John Morgan, 2001. "Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets," American Economic Review, American Economic Association, vol. 91(3), pages 454-474, June.
    8. Nishimura, Kiyohiko G., 1995. "Product innovation with mass-production: Insufficient or excessive?," Japan and the World Economy, Elsevier, vol. 7(4), pages 419-442, November.
    9. Wang, X. Henry & Zhao, Jingang, 2007. "Welfare reductions from small cost reductions in differentiated oligopoly," International Journal of Industrial Organization, Elsevier, vol. 25(1), pages 173-185, February.
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    Cited by:

    1. repec:spr:epolin:v:44:y:2017:i:2:d:10.1007_s40812-016-0033-x is not listed on IDEAS
    2. T. Heikkinen, 2014. "A Hotelling model of spatial competition with local production," Letters in Spatial and Resource Sciences, Springer, vol. 7(2), pages 103-120, July.

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