Does the coexistence of online and offline firms improve welfare?

Discussion Papers

No.814

by Xiwei Zhu and Toshitaka Gokan

March 2021

ABSTRACT

This study shows how the coexistence of online and offline firms affects consumer welfare. By introducing two dimensions of heterogeneity in productivity and quality, we find that the consumers' indirect utility under the coexistence of online and offline firms is higher than that of only offline firms. Specifically, we show that: (1) if the initial investment of online firms is small enough or if the initial investment of offline firms is large enough, or (2) if the fixed costs of offline firms are sufficiently large under the general distribution of productivity and quality. Additionally, we find that the cutoff productivity level of domestic online firms increases due to the cost-saving of the fixed costs among online exporting firms, leading to the higher indirect utility compared to the indirect utility without cost-saving.

Keywords: Heterogeneous firms, Online, Offline

JEL classification: D04, R12

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