Does the Internet Activity within a Zip-Code Area correlate with the difference between Off- and Online Prices of Multi-Channel Retailers in the US?

The internet has changed the retailing sector by created a new channel of retailing other than offline (physical store), namely online (website) retailing. Although they sell the same product the two channels often offer different prices. This empirical study uses cross-sectional data to identify if internet activity that is proxied by the number of Internet Service Providers (ISP) within a zip-code area, correlates with the difference between offline and online prices of multi-channel retailers. Furthermore, the sign of the correlation is assumed to be driven by two opposing forces, namely online dynamic pricing (negative) and higher online competition (positive). The data used originates from the paper: Are online and offline prices similar? evidence from large multi-channel retailers (Cavallo, 2017), which contains off- and online prices of goods located in 250 US zip code areas. The observations are predominantly concentrated in the state of Massachusetts. Therefore, the conservative finding of this paper is as follow: in Massachusetts, when the online price of a good is higher than that of its offline price, via higher online competition, increasing internet activity correlates with the decrease of online prices for multi-channel retailers. No evidence of dynamic pricing is found via internet activity.