How Online Shopping Reshapes an Industry

By Patricia Houlihan

Online Shopping

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The advent of e-commerce, economists agree, lowered prices and price dispersion and strongly influenced the number and type of producers that operate in an industry. But which businesses benefitted or suffered the most? In “E-Commerce and the Market Structure of Retail Industries,” professor of economics Chad Syverson and his coauthors examined three industries—bookstores, travel agencies, and new-car dealerships—to find that the internet has led some brick-and-mortar business owners, predominantly the smaller ones, to shut their doors, even as it spurred growth of the largest businesses and led still others to enter the market.

An oft-cited example: after such travel websites as Orbitz, Travelocity, and Expedia were launched, many local travel agencies closed. Booksellers, too, found it difficult to compete with the selection and low prices offered by such online sellers as Amazon.com.

By examining data on internet usage from a survey of U.S. households, as well as data on the size of firms in each of the three industries in every county in the continental United States, Syverson and his coauthors determined the impact of the internet on firms over the 10 years leading up to 2004, when e-commerce took hold firmly in the country. While large firms (such as chain bookstores) grew at the expense of smaller ones, they found, the effect was the largest in areas where online shopping was the greatest.

“It is almost certain that more than just equilibrium prices are affected when e-commerce spreads in an industry,” the researchers wrote. “Market shares are very likely to change; given the reduction in consumer search costs that e-commerce can bring, any firm’s price advantage will be multiplied in terms of market-share gains.” In fact, they added, “It is also quite likely that these market share changes can be drastic enough to lead some firms to exit from the market entirely.”

“The theory suggests that as people become better informed thanks to the web, the businesses that cater most to their desires will thrive,” a story on the research in the Economist noted. “The internet allows customers to see business’s true colors. The adjustment that follows may be wrenching. But the net effect is one that conforms to what consumers want, whether they admit it to themselves or not.”—P.H.

Last Updated 3/3/11