Network Shop And Entity Shop Sales Competition

Consumer will balance costs when they shopping, for a consumer has to paytransport cost if he wants to buy goods in a traditional store, and to pay search cost buyingin an online store. This paper set up a mathematical model to analyzes the competition andthe social welfare between an online store and traditional stores, based on the circular citymodel of Salop (1979)[1].From consumer’s perspective, for one thing, the distance is different when consumerfacing different traditional stores. For another thing, online store is more convenientbecause the dealing could be completed at home which has no constraint of geographylocation, but consumers have to pay search costs when they choose goods in differentonline stores. Therefore, this paper further assumes that the traditional stores exist on thecircle city, and online stores exist on the centre of the circle or concentric circles on whereis also its depository. The assuming make sure each consumer goes to an online store withthe same distance.The study found that: if there are n traditional stores and many consumers uniformlyexisting on the circular city, each consumer has three chooses to buy goods: goingtraditional store i, going traditional store j and going online store. In the long run, storeswill enter constantly to pursue excess profit, and then the distance between two traditionalstores is short and the degree of product differentiation is low. The consumers between twotraditional stores will become the object of competition among stores. After online storeentering, the consumer welfare will increasing, the stores welfare will reduce if marketdemand has no change, and the social welfare’s change depend on the fixed costs to buildan online store.The former two chapters are introduction and overview. The third chapter gives themarket equilibrium when traditional stores and an online store compete with prices only.The fourth chapter discusses the competition with advertising which will affect stores’demand. The fifth chapter compares the difference of the welfare consequences. The lastchapter gives some policy recommendations.