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Goodbye Pareto Principle, Hello Long Tail: The Effect of Search Costs on the Concentration of Product Sales

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Author Info

  • Erik Brynjolfsson

    ()
    (MIT Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02142; and the National Bureau of Economic Research, Cambridge, Massachusetts 02138)

  • Yu (Jeffrey) Hu

    ()
    (Krannert School of Management, Purdue University, West Lafayette, Indiana 47907)

  • Duncan Simester

    ()
    (MIT Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02142)

Abstract

Many markets have historically been dominated by a small number of best-selling products. The Pareto principle, also known as the 80/20 rule, describes this common pattern of sales concentration. However, information technology in general and Internet markets in particular have the potential to substantially increase the collective share of niche products, thereby creating a longer tail in the distribution of sales. This paper investigates the Internet's "long tail" phenomenon. By analyzing data collected from a multichannel retailer, it provides empirical evidence that the Internet channel exhibits a significantly less concentrated sales distribution when compared with traditional channels. Previous explanations for this result have focused on differences in product availability between channels. However, we demonstrate that the result survives even when the Internet and traditional channels share exactly the same product availability and prices. Instead, we find that consumers' usage of Internet search and discovery tools, such as recommendation engines, are associated with an increase the share of niche products. We conclude that the Internet's long tail is not solely due to the increase in product selection but may also partly reflect lower search costs on the Internet. If the relationships we uncover persist, the underlying trends in technology portend an ongoing shift in the distribution of product sales. This paper was accepted by Ramayya Krishnan, information systems.

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File URL: http://dx.doi.org/10.1287/mnsc.1110.1371
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 57 (2011)
Issue (Month): 8 (August)
Pages: 1373-1386

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Handle: RePEc:inm:ormnsc:v:57:y:2011:i:8:p:1373-1386

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Related research

Keywords: long tail; search cost; product variety; concentration; product sales; Internet; electronic commerce;

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Cited by:
  1. Weeds, Helen, 2011. "Superstars and the Long Tail: The impact of technology on market structure in media industries," CEPR Discussion Papers 8719, C.E.P.R. Discussion Papers.
  2. Handke, Christian, 2012. "Digital copying and the supply of sound recordings," Information Economics and Policy, Elsevier, vol. 24(1), pages 15-29.
  3. Carlos Serrano-Cinca & Begoña Gutiérrez-Nieto, 2012. "Microfinance, the long tail and mission drift," Working Papers CEB 12-001, ULB -- Universite Libre de Bruxelles.
  4. Pozzi, Andrea, 2013. "E-commerce as a stockpiling technology: Implications for consumer savings," International Journal of Industrial Organization, Elsevier, vol. 31(6), pages 677-689.
  5. Michael R. Baye & Babur De los Santos & Matthijs R. Wildenbeest, 2013. "Searching for Physical and Digital Media: The Evolution of Platforms for Finding Books," Working Papers 2013-04, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  6. Tobias Kretschmer & Christian Peukert, 2014. "Video Killed the Radio Star? Online Music Videos and Digital Music Sales," CEP Discussion Papers dp1265, Centre for Economic Performance, LSE.
  7. Brinja Meiseberg, 2014. "Trust the artist versus trust the tale: performance implications of talent and self-marketing in folk music," Journal of Cultural Economics, Springer, vol. 38(1), pages 9-42, February.
  8. Marc Bourreau & Michel Gensollen & François Moreau & Patrick Waelbroeck, 2013. "“Selling less of more?” The impact of digitization on record companies," Journal of Cultural Economics, Springer, vol. 37(3), pages 327-346, August.
  9. Ajay K. Agrawal & Nicola Lacetera & Elizabeth Lyons, 2013. "Does Information Help or Hinder Job Applicants from Less Developed Countries in Online Markets?," NBER Working Papers 18720, National Bureau of Economic Research, Inc.

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