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Consumer Surplus in the Digital Economy: Estimating the Value of Increased Product Variety at Online Booksellers

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Author Info

  • Erik Brynjolfsson

    ()
    (Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139)

  • Yu (Jeffrey) Hu

    ()
    (Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139)

  • Michael D. Smith

    ()
    (The Heinz School of Public Policy and Management, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

Abstract

We present a framework and empirical estimates that quantify the economic impact of increased product variety made available through electronic markets. While efficiency gains from increased competition significantly enhance consumer surplus, for instance, by leading to lower average selling prices, our present research shows that increased product variety made available through electronic markets can be a significantly larger source of consumer surplus gains. One reason for increased product variety on the Internet is the ability of online retailers to catalog, recommend, and provide a large number of products for sale. For example, the number of book titles available at Amazon.com is more than 23 times larger than the number of books on the shelves of a typical Barnes & Noble superstore, and 57 times greater than the number of books stocked in a typical large independent bookstore. Our analysis indicates that the increased product variety of online bookstores enhanced consumer welfare by $731 million to $1.03 billion in the year 2000, which is between 7 and 10 times as large as the consumer welfare gain from increased competition and lower prices in this market. There may also be large welfare gains in other SKU-intensive consumer goods such as music, movies, consumer electronics, and computer software and hardware.

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File URL: http://dx.doi.org/10.1287/mnsc.49.11.1580.20580
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 49 (2003)
Issue (Month): 11 (November)
Pages: 1580-1596

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Handle: RePEc:inm:ormnsc:v:49:y:2003:i:11:p:1580-1596

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Keywords: Consumer Surplus; Product Variety; Electronic Commerce; Welfare; Internet;

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References

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  1. Jerry A. Hausman, 1997. "Valuing the Effect of Regulation on New Services in Telecommunications," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1997 Micr), pages 1-54.
  2. Mark Bils & Peter J. Klenow, 2001. "The Acceleration of Variety Growth," American Economic Review, American Economic Association, vol. 91(2), pages 274-280, May.
  3. Stephen J. Hoch & Eric T. Bradlow & Brian Wansink, 1999. "The Variety of an Assortment," Marketing Science, INFORMS, vol. 18(4), pages 527-546.
  4. Austan Goolsbee & Judith Chevalier, 2002. "Measuring Prices and Price Competition Online: Amazon and Barnes and Noble," NBER Working Papers 9085, National Bureau of Economic Research, Inc.
  5. Hausman, Jerry A & Newey, Whitney K, 1995. "Nonparametric Estimation of Exact Consumers Surplus and Deadweight Loss," Econometrica, Econometric Society, vol. 63(6), pages 1445-76, November.
  6. Amil Petrin, 2001. "Quantifying the Benefits of New Products: The Case of the Minivan," NBER Working Papers 8227, National Bureau of Economic Research, Inc.
  7. Bresnahan, Timothy F, 1986. "Measuring the Spillovers from Technical Advance: Mainframe Computers inFinancial Services," American Economic Review, American Economic Association, vol. 76(4), pages 742-55, September.
  8. Aviv Nevo, 2001. "New Products, Quality Changes and Welfare Measures Computed From Estimated Demand Systems," NBER Working Papers 8425, National Bureau of Economic Research, Inc.
  9. Fiona Scott Morton & Florian Zettelmeyer & Jorge Silva-Risso, 2001. "Internet Car Retailing," NBER Chapters, in: E-commerce, pages 501-519 National Bureau of Economic Research, Inc.
  10. Brown, Jeffrey, 2000. "Does the Internet Make Markets More Competitive? Evidence from the Life Insurance Industry," Working Paper Series rwp00-007, Harvard University, John F. Kennedy School of Government.
  11. Morton, Fiona Scott & Zettelmeyer, Florian & Silva-Risso, Jorge, 2001. "Internet Car Retailing," Journal of Industrial Economics, Wiley Blackwell, vol. 49(4), pages 501-19, December.
  12. Austan Goolsbee & Amil Petrin, 2001. "The Consumer Gains from Direct Broadcast Satellites and the Competition with Cable Television," NBER Working Papers 8317, National Bureau of Economic Research, Inc.
  13. Hausman, Jerry A, 1981. "Exact Consumer's Surplus and Deadweight Loss," American Economic Review, American Economic Association, vol. 71(4), pages 662-76, September.
  14. Timothy F. Bresnahan & Robert J. Gordon, 1996. "The Economics of New Goods," NBER Books, National Bureau of Economic Research, Inc, number bres96-1.
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