Electronic Commerce and Retail Channel Substitution

We analyze a market where firms compete in a conventional and an electronic retail channel. Consumers easily compare prices online, but some incur purchase uncertainties on the online channel. We investigate the market shares of the two retail channels and the prices that are charged. We find that the share of the electronic channel is decreasing in the size of the uncertainty. Furthermore, searching consumers do not always buy. They drop out when the uncertainty associated with buying online is not offset by a low price. Finally, the model exhibits price dispersion and the expected price is increasing in the magnitude of the online purchase uncertainty.