1 ONLINE BUSINESS COMPETITION AND SOCIAL COSTS IN A DIFFERENTIATED GOODS MARKET

This paper provides an economic model to examine the competition effects of the online channel in a differentiated goods market. We consider the coexistence equilibrium where online and offline firms coexist in an equilibrium and measure the welfare loss of online business competition. We show that, compared to the case of pure online competition, the introduction of online channel by the hybrid firm might reduce the welfare if the consumer's transportation cost through offline channel is sufficiently larger than the firm's delivery cost of online channel. Finally, we incorporate the Internet maturity into the model and examine how the degree of online access affects the welfare consequences of online competition