The Impact of Location on Consumer Purchases in Electronic Markets

The Internet has been thought of as a technological advancement that will bridge the geographical digital divide and remove the disparities between underserved communities and the rest of the society. In order to examine the existence of underserved communities, we examine how changes in the local supply of goods and services in the offline world changes consumer behavior in technology enabled electronic markets. For example, retail markets for consumer products such as books, music, and videos have traditionally been predominantly local. As local markets increase in size from small towns to large cities, consumers are affected in two ways. First, holding product offerings among retailers fixed, an increase in the size of a location encourages new firm entry that in turn lowers prices and improves service levels. Moreover, larger markets also allow retailers to provide a wider array of product offerings targeted to market segments that would be infeasible in smaller town settings. The emergence of new online retailing channels may act as a substitute for the benefits of urban concentration both by offering lower prices and by providing increased product differentiation for rural consumers. The open question is which of these phenomena are more important: how do consumers use online channels to substitute for offline supply deficiencies, and how does this vary across locations in the United States? We explore this problem using data from Amazon on the top selling books and DVDs for over 8626 unique locations in the US over 10 months between 2005-2006. We show that even controlling for product-specific preferences by location, there are still considerable differences in the responses of locations of different population sizes to price and popularity changes of DVDs and books. These can be attributed to differences in local supply conditions as well as other factors such as demographic characteristics and high speed internet penetration.