Uncertainty kills the long tail: demand concentration in peer-to-peer marketplaces

Theory on the “Long tail effect” predicts that consumer demand in online markets spreads over a long tail of niche products. Recent research, however, provides opposing evidence and questions the theory’s validity. In this paper, I aim to reconcile these opposing findings by proposing that consumer uncertainty represents a hidden yet important boundary condition for the long tail effect. Under high uncertainty, demand will be much more concentrated as consumers disproportionally choose the most reputable producers and products. I develop these arguments to predict the demand concentration in peer-to-peer marketplaces, a context in which consumers face high uncertainties about their transaction partners. Testing my predictions with a self-collected dataset of 862,755 transactions on a peer-to-peer marketplace for skillsharing supports my hypotheses. I find that a small share of producers disproportionately benefits from marketplace participation. During the observation period, twenty percent of producers generated 94% of sales. These findings suggest that an opposing rich-get-richer effect overrides the long tail effect in peer-to-peer marketplaces and other uncertain environments. I discuss how these findings inform research on peer-to-peer marketplaces and the sharing economy more broadly.