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Real and Virtual Competition

Oksana Loginova ()

No 715, Working Papers from Department of Economics, University of Missouri

Abstract: 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.

Keywords: Electronic Commerce; Oligopoly Pricing; Market Segmentation; Spatial Competition. (search for similar items in EconPapers)
JEL-codes: D43 D81 L11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-ict, nep-mic and nep-mkt
Date: 2007-07-31
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Published in Journal of Industrial Economics 2009

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