E-commerce and the Market Structure of Retail Industries

Abstract

While a fast-growing body of research has looked at how the advent and diffusion of e- commerce has affected prices, much less work has investigated e-commerce's impact on the number and type of firms operating in an industry. This paper theoretically and empirically takes up the question of which producers most benefit and most suffer as consumers switch to purchasing products online. We specify a general industry model involving consumers with differing search costs buying products from heterogeneous-type producers. We interpret 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 find evidence in both industries of the market share shifts predicted by the model. Interestingly, while both industries experienced similar changes, the specific mechanisms through which e-commerce induced them were different. For travel agencies, the shifts reflected aggregate changes driven by airlines' reductions in agent commissions as consumers started buying tickets online. For bookstores, on the other hand, industry-wide declines in small book stores reflected aggregated market-specific impacts, evidenced by the fact that more small-store exit occurred in those local markets where consumers' use of e-commerce channels grew fastest.