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

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.MIT Center for Digital BusinessNational Science Foundation (U.S.) (Grant IIS-0085725

Competitive advantage from mandatory investments: An empirical study of Australian firms

Mandatory information system (IS) investments occur when government regulations require firms to alter their IS. These investments are additional expenditures added onto the initial expenditures of non-mandatory IS investments. Managers are concerned about associated costs and in an attempt to reduce the expenditures, most firms refrain from formal planning methods when mandatory investments are imposed upon them. Drawing on Henderson’s and Sifonis’ (1988) IS Planning and Investment Model as our theoretical lens, this paper argues that firms should re-consider this practice. It is hypothesised that formal planning methods are beneficial because they enable firms to combine mandatory and non-mandatory investments in such a way that competitive advantage can be achieved. We use a secondary dataset provided by the Australian government to test the hypotheses. Results show that only two out of three investigated formal planning methods are positively associated with competitive advantage. We conclude that in the special case of mandatory investments, formal methods are only beneficial if they incorporate information from the entire firm, rather than information from particular departments only

Recommender Systems

The ongoing rapid expansion of the Internet greatly increases the necessity of effective recommender systems for filtering the abundant information. Extensive research for recommender systems is conducted by a broad range of communities including social and computer scientists, physicists, and interdisciplinary researchers. Despite substantial theoretical and practical achievements, unification and comparison of different approaches are lacking, which impedes further advances. In this article, we review recent developments in recommender systems and discuss the major challenges. We compare and evaluate available algorithms and examine their roles in the future developments. In addition to algorithms, physical aspects are described to illustrate macroscopic behavior of recommender systems. Potential impacts and future directions are discussed. We emphasize that recommendation has a great scientific depth and combines diverse research fields which makes it of interests for physicists as well as interdisciplinary researchers.Comment: 97 pages, 20 figures (To appear in Physics Reports

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

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 provide a large number of products for sale. For example, the number of book titles available at Amazon.com is over 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 at least five 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 hardwar

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

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 welfare, 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 welfare gains. One reason for increased product variety on the Internet is the ability of online retailers to provide a large number of products for sale. For example, the number of book titles available at Amazon.com is over 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 at least five 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