Description:
E-commerce is the fastest growing subsector within retail trade, yet the exact nature of competition between physical stores and the online channel is thinly studied empirically. Following a period of rapid growth, national aggregate establishment counts for the bookstore industry declined by over 40% between 1994 to 2012. I measure the differential effect of online competition on brick-and-mortar bookstores, using unique establishment-level data between 1987 to 2012 combined with measures of e-commerce levels from Forrester Research’s Technographics Survey. To trace out the impact of e-commerce, I exploit geographic and temporal variation in the level of online activities. I find that online competition has a larger negative effect on large chain stores than on single-unit stores. Furthermore, bookstores that were the most insulated from online competition are precisely the stores that sell a wide array of products outside of books, such as food, gift cards, and clothing. In response to surging online competition, stores have expanded their non-book product offerings over time. However, the largest bookstores chains were still most negatively impacted given that they were relative inefficient at non-book retailing. I develop a dynamic oligopoly model of the bookstore industry to quantify the effect of online retail on equilibrium market structure. One implication of the model is that the rise of online competition has disproportionately reduced long-run profitability for the large chains by over 30 % in the last time period of study, despite their non-book presence increasing the most over time