Prices, Locations and Welfare When an Online Retailer Competes with Heterogeneous Brick-and-Mortar Retailers

Abstract

This study proposes a novel spatial model in which an online retailer competes with heterogeneous brick-and-mortar retailers. Consumers are assumed to be non-uniformly distributed along an urban-rural line, and online transactions provide savings in transportation costs at the expense of distaste costs. Among other results, we show that the surviving brick-and-mortar retailers eventually move toward densely populated (urban) areas after the entry of the online retailer. Consumer welfare, the policy of not taxing online business, and the socially optimal number of retailers are also analyzed.