Battle of the Retail Channels: How Internet Selection and Local Retailer Proximity Drive Cross-Channel Competition

A key question for Internet commerce is the nature of competition with traditional brick-andmortar 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? To answer this question, we collect a unique dataset on the local market structure and match it to a dataset on consumer demand through both Internet and catalog channels. We find that local market structure can significantly explain variations in demand through these two direct channels. Interestingly, we find that Internet sales of niche products, 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 does, the competition between Internet and local store channels is less intense than that between the catalog and local store channels.