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Real and Virtual Competition

Although the Internet reduces market frictions by making it easier for consumers to obtain information about prices and product offerings, goods sold by electronic firms are not perfect substitutes for otherwise identical goods sold by conventional stores. Online purchases, due to non-zero shipping time, are associated with waiting costs, and they do not allow consumers to inspect the product prior to purchase. Visiting a conventional store, on the other hand, involves positive travelling costs. A model extending the circular city paradigm with two types of firms, conventional and electronic, is studied. Under the benchmark setting with only conventional firms in the market, each consumer visits the nearest store and purchases the product there. When electronic firms enter the market, an intriguing type of market segmentation may arise. First, each consumer travels to the nearest conventional store to "try on" the product. Second, conventional retailers increase their prices and sell the good only to consumers who discover that they have high valuations; consumers with low valuations return "home" and order the good online. In spite of the increased competition from Internet retailers, welfare decreases.

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File URL: http://economics.missouri.edu/working-papers/2007/wp0715_loginova.pdf
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Paper provided by Department of Economics, University of Missouri in its series Working Papers with number 0715.

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Length: 26 pgs.
Date of creation: 31 Jul 2007
Date of revision:
Publication status: published in Journal of Industrial Economics 2009
Handle: RePEc:umc:wpaper:0715
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  1. 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.
  2. Erik Brynjolfsson & Michael D. Smith, 2000. "Frictionless Commerce? A Comparison of Internet and Conventional Retailers," Management Science, INFORMS, vol. 46(4), pages 563-585, April.
  3. Mark A. Satterthwaite, 1979. "Consumer Information, Equilibrium Industry Price, and the Number of Sellers," Bell Journal of Economics, The RAND Corporation, vol. 10(2), pages 483-502, Autumn.
  4. Anirban Sengupta & Steven Wiggins, 2006. "Airline Pricing, Price Dispersion and Ticket Characteristics On and Off the Internet," Working Papers 06-07, NET Institute, revised Oct 2006.
  5. 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.
  6. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  7. 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.
  8. Rosenthal, Robert W, 1980. "A Model in Which an Increase in the Number of Sellers Leads to a Higher Price," Econometrica, Econometric Society, vol. 48(6), pages 1575-79, September.
  9. J. Yannis Bakos, 1997. "Reducing Buyer Search Costs: Implications for Electronic Marketplaces," Management Science, INFORMS, vol. 43(12), pages 1676-1692, December.
  10. Emin M. Dinlersoz & Pedro Pereira, 2006. "On the Diffusion of Electronic Commerce," Working Papers 13, Portuguese Competition Authority.
  11. 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.
  12. Clay, Karen & Krishnan, Ramayya & Wolff, Eric, 2001. "Prices and Price Dispersion on the Web: Evidence from the Online Book Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 49(4), pages 521-39, December.
  13. Peter J. Danaher & Isaac W. Wilson & Robert A. Davis, 2003. "A Comparison of Online and Offline Consumer Brand Loyalty," Marketing Science, INFORMS, vol. 22(4), pages 461-476, February.
  14. repec:ner:tilbur:urn:nbn:nl:ui:12-339976 is not listed on IDEAS
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