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

  • 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)

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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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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  1. Erik Brynjolfsson & Yu (Jeffrey) Hu & Michael D. Smith, 2003. "Consumer Surplus in the Digital Economy: Estimating the Value of Increased Product Variety at Online Booksellers," Management Science, INFORMS, vol. 49(11), pages 1580-1596, November.
  2. 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.
  3. J. Yannis Bakos, 1997. "Reducing Buyer Search Costs: Implications for Electronic Marketplaces," Management Science, INFORMS, vol. 43(12), pages 1676-1692, December.
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  8. Erik Brynjolfsson & Yu (Jeffrey) Hu & Mohammad S. Rahman, 2009. "Battle of the Retail Channels: How Product Selection and Geography Drive Cross-Channel Competition," Management Science, INFORMS, vol. 55(11), pages 1755-1765, November.
  9. Charlotte R. Ren & Ye Hu & Yu (Jeffrey) Hu & Jerry Hausman, 2011. "Managing Product Variety and Collocation in a Competitive Environment: An Empirical Investigation of Consumer Electronics Retailing," Management Science, INFORMS, vol. 57(6), pages 1009-1024, June.
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  12. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
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  14. Judith Chevalier & Austan Goolsbee, 2003. "Measuring Prices and Price Competition Online: Amazon.com and BarnesandNoble.com," Quantitative Marketing and Economics, Springer, vol. 1(2), pages 203-222, June.
  15. 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.
  16. Michael Rothschild, 1974. "Searching for the Lowest Price When the Distribution of Prices Is Unknown: A Summary," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 3, number 1, pages 293-294 National Bureau of Economic Research, Inc.
  17. Prabuddha De & Yu (Jeffrey) Hu & Mohammad S. Rahman, 2010. "Technology Usage and Online Sales: An Empirical Study," Management Science, INFORMS, vol. 56(11), pages 1930-1945, November.
  18. Eric T. Anderson & Duncan I. Simester, 2010. "Price Stickiness and Customer Antagonism," The Quarterly Journal of Economics, Oxford University Press, vol. 125(2), pages 729-765.
  19. Rothschild, Michael, 1974. "Searching for the Lowest Price When the Distribution of Prices Is Unknown," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 689-711, July/Aug..
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