We develop a formal model of online-offline retail channel substitution
to identify three factors that drive consumers to purchase online:
convenience, selection, and price. This model builds hypotheses on how
features of offline retail supply impact online purchasing. We then
examine how the local availability of offline retail options drives use
of the online channel and consequently how the convenience, selection,
and price advantages of the online channel may vary by geographic
location. In particular, we examine the effect of local store openings
on online book purchases in that location. We explore this problem using
data from Amazon on the top selling books for 1501 unique locations in
the US for 10 months ending in January 2006. In addition to this data,
we use information on changes in local retail competition as measured by
openings of large bookstores such as Borders or Barnes & Noble and
discount stores such as Wal-Mart or Target. We show that even
controlling for product-specific preferences by location, changes in
local retail options have substantial effects on online purchases. We
demonstrate how the convenience, selection, and price benefits of the
Internet are different for consumers in different types of locations.
More generally, we show that geography significantly impacts the benefit
that consumers derive from electronic markets
