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Amazon vs. the Corner Bookshop

The Internet has indeed caused many small stores to close, because they are unable to compete with large Web retailers offering reduced prices and more convenience for shoppers.

(originally published by Booz & Company)

Title: E-commerce and the Market Structure of Retail Industries
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Authors: Maris Goldmanis (University of Chicago) et al.

Publisher: Economic Journal, vol. 120, no. 545

Date Published: June 2010

Has the Internet really put small storefronts out of business? This paper tested the widespread assumption that Amazon, for example, is largely responsible for the widespread shuttering of mom-and-pop bookshops, or that Orbitz and Travelocity have caused the ruin of local travel agents. Because customers can now search online for the lowest prices, the theory holds, they don’t need to shop around at small local stores, which in turn struggle to compete with the price-slashing efficiency of the Web. The researchers looked at three of the industries that have been most affected by the rise of e-commerce: bookstores, travel agencies, and new-car dealerships. Although they found evidence that Internet superstores have indeed hurt local retailers, they also noted that new opportunities have opened for niche operations that cater to specific customers in ways that the Internet behemoths cannot.

The researchers analyzed county-level data for the continental United States from 1994 to 2003, the period when shopping via the Internet took off, and measured the total number of stores and their size for each of the three industries studied. They matched this data to an annual survey of 55,000 Americans that gauged respondents’ Internet usage and online shopping habits over the same 10-year period. The authors found that the rapid rise in Web traffic and e-commerce changed the structure of — not just the price of goods or services in — all three industries. Larger physical businesses generally boomed while smaller ones faded away. However, the most successful small retailers, such as “cult” record stores and bookshops dealing in rare manuscripts, found ways to adapt to the Web and reach larger numbers of customers with more personalized goods or services. Travel agencies fared the worst: Their numbers actually increased slightly until 1997, but that’s when more consumers began reporting online travel purchases. Accordingly, the number of travel agencies dropped by more than 35 percent between 1997 and 2003. Small establishments were hit particularly hard; in the 10 years up to 2003, the number of agencies that had more than 100 people on the payroll increased by 70 percent, while the number of smaller firms shrank by a third.

The researchers posit an explanation: Many smaller companies that couldn’t survive in the new cutthroat environment were forced to merge with larger rivals. In addition, these bigger outfits were more likely to own or host successful travel websites, further solidifying their grip on the industry.

Similar changes were observed in bookstores, where the number of shops with 20 workers or fewer declined by more than one-fourth during the 10-year period, while the number of those that employed more than 20 people doubled. This reflected the rise of large chain bookstores such as Barnes & Noble and Borders. Overall, employment in the two industries fell after the introduction of e-commerce, suggesting any job gains at large Internet companies did not offset those lost at smaller retailers. It’s notable that the new-car dealership industry, prohibited by law from operating online-only businesses, did not see a loss in jobs; the most dramatic impact of e-commerce on new-car sales was on prices, because consumers could shop around online.

Bottom Line:
This paper confirms that the rise in e-commerce has led to a decline in smaller retail establishments and the increased dominance of larger Internet firms.

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