For retailing, the key change produced by the Internet is that shopping online spared consumers the economic costs (in time, grief and gas money) of visiting a store and locating a product. This has been called the “death of distance.” When even isolated individuals can buy anything from a global marketplace, physical location does not confer any commercial advantage, and online merchants might be expected to win every battle.
But an emerging body of economic research shows that there is no independent “online world.” Physical context matters to e-commerce. It shapes our choices and tastes, and it strongly determines what we buy online. With the rise of mobile computing, these local effects matter even more.
Given how easy it is to find and buy books, electronics and other items online, why do people continue to buy in stores at all? The reason is that online buying generates what economists call disutility: inspecting digital products is difficult, shipping can be slow or expensive, and returning products can be challenging.
Research shows that people weigh these disadvantages against the benefits of buying online. Along with colleagues Chris Forman and Anindya Ghose, I examined what happened to Amazon’s book sales at 1,497 U.S. locations when a Walmart or Barnes & Noble opened nearby. We found that customers who lived near the newly opened stores bought many fewer best-sellers from Amazon.

This means that for mainstream products, local retail options — the offline world — had large economic effects on online business. The physical environment shapes online behavior in other powerful ways. Neighbors tend to like the same music, books and cars. Social networks are also local. Most emails a person receives come from the same city, often the same building. So even though we speak of the Internet as a “place” where users “visit” websites, this metaphor falls flat when we consider actual behavior. All online behavior has an offline context.
Mobile computing strengthens the links between online and offline life. Before, online activity happened in a specific place, sitting at a desk. Now, smartphones mean that wherever consumers happen to be, they can gather information online, compare prices or buy something. Brick-and-mortar stores worry that customers might be browsing products in their aisles, but buying online.
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Yet the offline environment is actually more important when consumers connect through a mobile device. With colleagues including Sang Pil Han of the City University of Hong Kong, we studied 260 users of a South Korean microblogging service similar to Twitter. What we found was that behavior on the small mobile screen was different from behavior on the PC. Searching became harder to do, meaning that people clicked on the top links more often. The local environment was also more important. Ads for stores in close proximity to a user’s home were more likely to be viewed. For every mile closer a store was, smartphone users were 23% more likely to click on an ad. When they were on a PC, they were only 12% more likely to click close-by stores.
Thus, the mobile Internet is less “Internet-like” than Web browsing on a PC: search costs are higher and distance matters more. We do not yet know how the growth of the mobile Internet will affect the balance between online and offline retailers. But it appears certain that real-world stores will do better if they can leverage the information available online, and that online retailers will need to understand their customers’ offline environment in order to succeed.
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This article originally published at MIT Technology Review here
MIT Technology Review is a Mashable publishing partner that identifies emerging technologies and analyzes their impact for technology and business leaders. This article is reprinted with the publisher's permission.