Discussion Papers

No.888 Competition between heterogenous online and offline firms

by Xiwei Zhu and Toshitaka Gokan

March 2023


We propose a model with heterogenous online and offline firms in an industry. Online firms need no additional fixed costs to export goods; however, offline firms do. Transaction costs between consumers and sellers are needed only in the online market. Consumers expect the quality of products in the online market but know the quality of products sold by offline firms. We find that low-quality firms with moderate productivity choose to be online firms. We show that a unique equilibrium value of the expected quality exists in the online market if transaction costs are sufficiently low, and if transport costs are sufficiently high. Furthermore, numerical analysis shows that online technology improves welfare, and transaction and transport costs have opposite impacts on welfare.

Keywords: Heterogenous firms, online, offline

JEL classification: D04, R12

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