Geography and the Internet: Is the Internet a Substitute or a Complement for Cities?

Abstract

By combining persons around the world into a single market, the Internet may serve as a substitute for urban agglomeration. That is, the Internet may level the consumption playing field between large, variety-laden and small, variety-starved markets. However, if local content on the Internet is more prevalent in larger markets, then the Internet may be a complement for urban agglomeration. Characterizing the nature of available content using Media Metrix web page visits by about 13,500 households, we document that substantially more online local content is available in larger markets. Combining this with CPS Internet use data, we find statistically significant direct evidence of both complementarity and substitutability: Individuals are more likely to connect in markets with more local online content; and holding local online content constant, are less likely to connect in larger markets. We also find that individuals connect to overcome local isolation: Blacks are more likely to connect, relative to whites, when they comprise a smaller fraction of local population, making the Internet is a substitute for agglomeration of preference minorities within cities, if not cities themselves. On balance we find that the substitution and complementarity effects offset each other so that the Internet does not promote or discourage agglomeration in larger markets.