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E-commerce and the Market Structure of Retail Industries

  • Onsel Emre

    (University of Chicago)

  • Ali Hortacsu

    (University of Chicago and NBER)

  • Chad Syverson

    ()

    (University of Chicago and NBER)

While a fast-growing body of research has looked at how the advent and di®usion of e- commerce has a®ected prices, much less work has investigated e-commerce's impact on the number and type of ¯rms operating in an industry. This paper theoretically and empirically takes up the question of which producers most bene¯t and most su®er as consumers switch to purchasing products online. We specify a general industry model involving consumers with di®ering search costs buying products from heterogeneous-type producers. We inter- pret e-commerce as having created reductions in consumers' search costs. We show how such shifts in the search cost distribution reallocate market shares from an industry's low- type producers to its high-type businesses. We test the model using data for two industries in which e-commerce has arguably decreased consumers' search costs considerably: travel agencies and bookstores. We ¯nd evidence in both industries of the market share shifts predicted by the model. Interestingly, while both industries experienced similar changes, the speci¯c mechanisms through which e-commerce induced them were di®erent. For travel agencies, the shifts re°ected aggregate changes driven by airlines' reductions in agent com- missions as consumers started buying tickets online. For bookstores, on the other hand, industry-wide declines in small book stores re°ected aggregated market-speci¯c impacts, evidenced by the fact that more small-store exit occurred in those local markets where consumers' use of e-commerce channels grew fastest.

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Paper provided by NET Institute in its series Working Papers with number 05-24.

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Length: 32 pages
Date of creation: Oct 2005
Date of revision: Oct 2005
Handle: RePEc:net:wpaper:0524
Contact details of provider: Web page: http://www.NETinst.org/

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  1. Chad Syverson, 2001. "Market Structure and Productivity: A Concrete Example," Working Papers 01-06, Center for Economic Studies, U.S. Census Bureau.
  2. Ali Hortaç Su & Chad Syverson, 2004. "Product Differentiation, Search Costs, And Competition in the Mutual Fund Industry: A Case Study of S&P 500 Index Funds," The Quarterly Journal of Economics, MIT Press, vol. 119(2), pages 403-456, May.
  3. Michael T. Rauh, 2005. "Nonstandard Foundations of Equilibrium Search Models," Working Papers 2005-02, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  4. Michael Smith & Erik Brynjolfsson, 1999. "Frictionless Commerce? A Comparison of Internet and Conventional Retailers," Computing in Economics and Finance 1999 1022, Society for Computational Economics.
  5. Simon Latcovich & Howard Smith, 2001. "Pricing, Sunk Costs, and Market Structure Online: Evidence from," Oxford Review of Economic Policy, Oxford University Press, vol. 17(2), pages 217-234, Summer.
  6. Mark Bagnoli & Ted Bergstrom, 2005. "Log-concave probability and its applications," Economic Theory, Springer, vol. 26(2), pages 445-469, 08.
  7. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
  8. Morton, Fiona Scott & Zettelmeyer, Florian & Silva-Risso, Jorge, 2001. "Internet Car Retailing," Journal of Industrial Economics, Wiley Blackwell, vol. 49(4), pages 501-19, December.
  9. Brown, Jeffrey, 2000. "Does the Internet Make Markets More Competitive? Evidence from the Life Insurance Industry," Working Paper Series rwp00-007, Harvard University, John F. Kennedy School of Government.
  10. Michael R. Baye & John Morgan & Patrick Scholten, 2004. "Price Dispersion in the Small and in the Large: Evidence from an Internet Price Comparison Site," Working Papers 2004-03, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  11. Karen Clay & Ramayya Krishnan & Eric Wolff, 2001. "Prices and Price Dispersion on the Web: Evidence from the Online Book Industry," NBER Working Papers 8271, National Bureau of Economic Research, Inc.
  12. McCall, John J, 1970. "Economics of Information and Job Search," The Quarterly Journal of Economics, MIT Press, vol. 84(1), pages 113-26, February.
  13. Benabou, Roland, 1988. "Search market equilibrium bilateral heterogeneity and repeat purchases," CEPREMAP Working Papers (Couverture Orange) 8806, CEPREMAP.
  14. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
  15. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213.
  16. Fiona Scott Morton & Florian Zettelmeyer & Jorge Silva-Risso, 2001. "Internet Car Retailing," NBER Chapters, in: E-commerce, pages 501-519 National Bureau of Economic Research, Inc.
  17. Ali Hortacsu & Chad Syverson, 2003. "Product Differentiation, Search Costs, and Competition in the Mutual Fund Industry: A Case Study of the S&P 500 Index Funds," NBER Working Papers 9728, National Bureau of Economic Research, Inc.
  18. Dunne, Timothy & Roberts, Mark J & Samuelson, Larry, 1989. "Plant Turnover and Gross Employment Flows in the U.S. Manufacturing Sector," Journal of Labor Economics, University of Chicago Press, vol. 7(1), pages 48-71, January.
  19. Michael T. Rauh, 2006. "Strategic Complementarities and Search Market Equilibrium," Working Papers 2006-01, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  20. Clay, Karen, et al, 2002. "Retail Strategies on the Web: Price and Non-price Competition in the Online Book Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 50(3), pages 351-67, September.
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