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The shop around the corner in the Internet age

Jérôme Foncel, Marianne Guyot and Frédéric JOUNEAU - Sion
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Jérôme Foncel: Université de Lille 3, Gremars
Marianne Guyot: Université de Lille 3, Gremars
Frédéric JOUNEAU - Sion: Université de Lille 3, GREMARS and Université Catholique de Louvain, CORE

No 2011025, Discussion Papers (REL - Recherches Economiques de Louvain) from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: We study a spatial competition model which is a variant of the celebrated Hotelling (1929) framework. One of the firm is a brick-and-mortar one while the other is on-line. Both firms sell the same product except that (constant) marginal costs may differ. Consumers going to the shop around the corner face transportation costs according to their adress whereas on-line consumers bear a fix cost that may capture technological burden and risk premium. In the pricing Nash equilibria the “new economy” firm has smaller market shares eventhough it offers more attractive prices. For the on-line firm to become a leader, the cost difference must be large enough to offset the comparative disadvantage it face on the demand side. In the long run, increasing competition ultimately forces the local firm out of downtown. We argue that this effect may be related to some of the forecasts concerning the geographical impact of the development of remote access services.

Keywords: spatial competition; economic geography; E-marketing (search for similar items in EconPapers)
JEL-codes: R12 L86 L11 (search for similar items in EconPapers)
Date: 2011-09-01
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