Battle of the Retail Channels: How Product Selection and Geography Drive Cross-Channel Competition

A key question for Internet commerce is the nature of competition with traditional brick-and-mortar retailers. Although traditional retailers vastly outsell Internet retailers in most product categories, research on Internet retailing has almost entirely neglected this fundamental dimension of competition. How and where can Internet retailers win this battle? This paper attempts to answer these questions using a unique combination of data sets. We collect a data set on the local market structure, and then match this data set on local market structure to a data set on consumer demand that is through direct channels that include Internet and catalog channels. Our analyses provide strong evidence that the local market structure can significantly explain the variation in demand through direct channels, even after controlling for the relevant demographic and socioeconomic variables in each local market. We find that the impact of the local market structure on consumer demand through direct channels is smaller in size for niche products than that for popular products. In addition, we identify the role of demand for popular products and demand for niche products in shaping the impact of local stores on the catalog channel and the Internet channel. The sales of niche products, which are often unavailable in physical stores, are largely immune from competition by traditional retailers. Since the Internet channel sells proportionately more niche products than the catalog channel, the level of competition between the Internet channel and local stores is lower than the level of competition between the catalog channel and local stores.