This is the summary of an article by Ethan Liever and Chad Syverson for the Oxford Handbook of the Digital Economy. You can get the pdf of the behavioral targeting article here: Online vs Offline Competition.
Jeff Bezos, founder, president and CEO of Amazon.com, understood the advantages of his online business selling books. Consumers can easily look for the books and products they want to buy, they can order from any location and most of the purchases do not have sales tax. He also understood its limitations. Consumers have to wait before they receive their orders. They can’t inspect the products they will be receiving beforehand. Amazon had to find unique ways of letting consumers know about their products before buying.
Brick-and-mortar book companies are now thinking, how should they use online marketing? What fundamental aspects of marketing do they need to change or maintain? This article discusses the competition between the offline and online segments of a market.
Onlines Sales versus Offline Sales
During the year 2008, Offline sales amounted to 18.7 trillion dollars, while that of online sales is 3.7 trillion dollars. That’s just around 16 percent of all sales for online. However, online sales have grown faster. Between the years 2002 to 2008, online sales grew by 120 percent while offline sales grew by 30 percent. Apparently, online sales will definitely rise as more and more people engage in e-commerce.
business-to-business (B2B) e-commerce dominates over business-to-consumer (B2C) e-commerce, but B2C is growing faster at 174 percent between the years 2002 to 2008.
Who Sells Online?
For manufacturing, 54 percent of online sales come from Transportation Equipment. For electroning shopping and the industry of mail-order houses, 47 percent are done through online sales. There are certain businesses such as dentistry which are not fit for online sales but the logistics of these businesses including billing and advertising can be done online. Across manufacturing industries, share of online sales are heterogeneous and most businesses adopted internet technology but not the extent of fundamentally changing their business.
Who buys online?
Internet users are those with higher income, younger, and are more educated. The higher the income, the more likely it is for an individual to use the Internet, although that ends after the 70,000 to 90,000 dollar annual income threshold. After that, there is no significant relationship between internet use and income. Education is also an important factor. You are 8 to 9 percent less likely to use the Internet if you did not graduate from highschool. Having a college degree increases the probability to 8 to 8 percent. In addition, the older you are, the less likely you are to be online.
Low income persons have less probability of buying something online, and the same is true for people who have no high school diploma. Racially, blacks are less likely to purchase than Whites, while Asians are not significantly more likely to buy goods online than Whites.
Difference Between Offline and Online Channel
E-commerce technology keeps customers from inspecting the goods they want to purchase beforehand. There is also a delay between purchase and consumption, but search costs among consumers is reduced. Furthermore, supply chain costs are reduced and/or services are improved due to new e-commerce technologies. Taxes are also different for offline and online sales.
information asymmetries for online purchases are due to several reasons, with the most obvious one being the fact that consumers can’t inspect the products prior to purchase. Therefore, the market becomes inefficient. There have been efforts to reduce asymmetries, including free shipment, but the delay of receiving the purchase still poses some problems. Another approach to asymmetry alleviation is by using third-party certification, where firms establish a quality reputation for their products.
Another interesting difference is market geography. Online sellers provide for the notion of “death of distance” according to Kolko (2000). There is some evidence that people living in more isolated cities tend to use the internet more. But there are studies that volume of exchanges decreases as distance increases.
There are no sales taxes for most online transactions. Chicago consumers that buy online can save up to 10.25 percent in sales tax for the year 2009, for example. If, however, sales taxes are added to online purchases, studies have shown that online retail sales could be reduced by a quarter.
How E-commerce Affects Market Outcomes
Lower distribution costs and reduced search costs are said to be the two main factors to reduce online market prices. It has been shown in several studies that this is the case. One example is that consumers who purchased cars with the help of an online service paid 2 percent less. However, online marketing is not as frictionless as when it was originally thought of to be during its early commercial applications. One market outcome is that lower-cost businesses may tend to grab larger shares off higher cost competition.