Online and Offline Sales in a Spatial Economy

Discussion Papers

No.757

by Xiwei Zhu and Toshitaka Gokan

April 2019

ABSTRACT

This study analyzes the interplay between cost-sharing and imperfect information among online firms competing with offline firms within an industry. By incorporating firm level quality, it shows how the intensity of cost-sharing, local market size, the number of regions being serviced, and the transport costs affect the expected quality of products, the "richness" of the varieties sold in the online market and social welfare. One of our results shows that a high intensity of cost- sharing, such as costs relating to the warehouse provided by the online platform, forces the lowest-quality firms to exit the online market but has no impact on the entry of higher-quality firms into the offline market. As a result, the average quality of products sold in the online market improves and the product variety decreases. Consequently, the welfare remains unchanged.

Keywords: Heterogeneous firms, Online, Offline

JEL classification: D04, R12

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