Electronic Commerce and Retail Channel Substitution

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