Why Online Retail Competition Does Not Always Benefit Consumers

Empirical studies to date have delivered mixed conclusions on the question of whether the widely acclaimed assertions of lower electronic retail (e-tail) prices are indeed true, and to what extent these benefits are able to transcend the virtual world by impacting retail prices. One explanation for the mixed conclusions is that they provide only a discrete snapshot of a limited segment of the market over a given interval of time. In this paper we use extensions to Salop’s (1979) city-around-the-lake model to examine the possible impact of an e-tail presence on conventional retailers’ decisions to relocate, retail prices, firms’ profits, and consumer welfare. Our analysis shows that many counter intuitive results are possible even in a well-known theoretical model: under some circumstances for example conventional retailers should not relocate in response to entry by an e-tailer into the retail market. Also, there are conditions under which entry by an e-tailer into the retail market can lead to increased retail prices, and increased industry profits across an industry. And, finally, consumer welfare can be increased with less competition. The underlying message of our results is that inferences regarding prices, profits, and the consumer welfare impact as a result of different e-tail and retail market configurations are not without ambiguity.