Numbers of bricks and clicks: Price competition between online and offline stores

Abstract

The development of internet technology has reshaped the market structure for many products.
We study the price competition problem between online stores and offine stores, by allowing
consumers' preferences to be more favorable towards online shopping. We consider 3 scenarios:
(1) market with one online store; (2) market with multiple online stores; (3) market with no
online store. For each scenario, we characterize equilibrium and conduct comparative statics
analysis. Our results show that the market environment parameters may have different effect on
important equilibrium variables, and the direction of such effect depends on consumers' relative
preference between online shopping and offine shopping. Furthermore, we provide a complete
characterization regarding the welfare comparisons among all possible market structures, showing that the optimal structure from the perspective of consumers or the social planner depends
on consumers' relative preferences between the two channels, while the optimal structure in
terms of producers' surplus maximization is the one with no online store. By revisiting the
competition between "Bricks" and "Clicks", we contribute to the literature with new insights
on both the comparative statics of equilibrium variables with respect to market environment
parameters and the welfare consequences of market competition under different structures.

Keywords: Salop Model, Online and Offine Competition, Vertical Differentiation, Horizontal Differentiation, Market Structure, Welfare Comparison

JEL Classification: C72, D43, L13, L87