| 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 producers operating in an
industry. This paper theoretically and empirically takes up the question of
which businesses 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 reduced consumers' search costs.
We show how such reductions reallocate market shares from an industry's
low-type producers to its high-type businesses. We test the model using U.S.
data for three industries in which e-commerce has arguably decreased
consumers' search costs considerably: travel agencies, bookstores, and new
auto dealers. Each industry exhibits the market share shifts predicted by the
model. Interestingly, while the industries experienced similar changes, the
specific mechanisms through which e-commerce induced them differed. For
bookstores and auto dealers, industry-wide declines in small outlets reflected
market-specific impacts, evidenced by the fact that more small-store exit
occurred in local markets where consumers' use of e-commerce channels grew
fastest. For travel agencies, on the other hand, the shifts reflected
aggregate changes driven by airlines cutting agent commissions as consumers
started buying tickets online. |