Goodbye Pareto Principle, Hello Long Tail: The Effect of Search Costs on the Concentration of Product Sales
TL;DR: Krishnan et al. as mentioned in this paper investigated the long tail phenomenon of the Pareto principle and found that consumers' usage of Internet search and discovery tools, such as recommendation engines, is associated with an increase in the share of niche products.
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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TL;DR: A number of item ranking techniques that can generate substantially more diverse recommendations across all users while maintaining comparable levels of recommendation accuracy are introduced and explored.
Abstract: Recommender systems are becoming increasingly important to individual users and businesses for providing personalized recommendations. However, while the majority of algorithms proposed in recommender systems literature have focused on improving recommendation accuracy (as exemplified by the recent Netflix Prize competition), other important aspects of recommendation quality, such as the diversity of recommendations, have often been overlooked. In this paper, we introduce and explore a number of item ranking techniques that can generate substantially more diverse recommendations across all users while maintaining comparable levels of recommendation accuracy. Comprehensive empirical evaluation consistently shows the diversity gains of the proposed techniques using several real-world rating data sets and different rating prediction algorithms.
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TL;DR: In this paper, the authors explore how Internet browsing behavior varies between mobile phones and personal computers and show that ranking effects are higher on mobile phones suggesting higher search costs and that the benefit of browsing for geographically close matches is higher.
Abstract: We explore how Internet browsing behavior varies between mobile phones and personal computers. Smaller screen sizes on mobile phones increase the cost to the user of browsing for information. In addition, a wider range of offline locations for mobile Internet usage suggests that local activities are particularly important. Using data on user behavior at a (Twitter-like) microblogging service, we exploit exogenous variation in the ranking mechanism of posts to identify the ranking effects. We show that (1) ranking effects are higher on mobile phones suggesting higher search costs: links that appear at the top of the screen are especially likely to be clicked on mobile phones and (2) the benefit of browsing for geographically close matches is higher on mobile phones: stores located in close proximity to a user's home are much more likely to be clicked on mobile phones. Thus, the mobile Internet is somewhat less “Internet-like”: search costs are higher and distance matters more. We speculate on how these cha...
409 citations
TL;DR: This article found that positive OCRs have no significant impact on the sales of the models of strong brands, although these models do receive a significant sales boost from their greater brand equity.
Abstract: Research has shown brand equity to moderate the relationship between online customer reviews (OCRs) and sales in both the emerging Blu-ray and mature DVD player categories. Positive (negative) OCRs increase (decrease) the sales of models of weak brands (i.e., brands without significant positive brand equity). In contrast, OCRs have no significant impact on the sales of the models of strong brands, although these models do receive a significant sales boost from their greater brand equity. Higher sales lead to a larger number of positive OCRs, and increased positive OCRs aid a brand's transition from weak to strong. This creates a positive feedback loop between sales and positive OCRs for models of weak brands that not only helps their sales but also increases overall brand equity, benefiting all models of the brand. In contrast to the view that brands matter less in the presence of OCRs, we find that OCRs matter less in the presence of strong brands. Positive OCRs function differently than marketing commun...
396 citations
TL;DR: The authors conducted a meta-analysis on the effect of electronic word of mouth on sales by examining 51 studies (involving 339 volume and 271 valence elasticities) and primary data collected on product characteristics (durability, trialability, and usage condition), industry characteristics (industry growth and competition), and platform characteristics (expertise and trustworthiness).
Abstract: The authors conduct a meta-analysis on the effect of electronic word of mouth on sales by examining 51 studies (involving 339 volume and 271 valence elasticities) and primary data collected on product characteristics (durability, trialability, and usage condition), industry characteristics (industry growth and competition), and platform characteristics (expertise and trustworthiness). Their analysis reveals that electronic word-of-mouth volume (valence) elasticity is .236 (.417). More importantly, the findings show that volume and valence elasticities are higher for privately consumed, low-trialability products that operate in less competitive industries and whose reviews are carried on independent review sites. Furthermore, volume elasticities are higher for durable goods and for reviews on specialized review sites, whereas valence elasticities are greater for community-based sites. Drawing on the results, they discuss several implications for managers and researchers and explain why valence elasticities...
367 citations
References
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TL;DR: The authors discusses the central role of propensity scores and balancing scores in the analysis of observational studies and shows that adjustment for the scalar propensity score is sufficient to remove bias due to all observed covariates.
Abstract: : The results of observational studies are often disputed because of nonrandom treatment assignment. For example, patients at greater risk may be overrepresented in some treatment group. This paper discusses the central role of propensity scores and balancing scores in the analysis of observational studies. The propensity score is the (estimated) conditional probability of assignment to a particular treatment given a vector of observed covariates. Both large and small sample theory show that adjustment for the scalar propensity score is sufficient to remove bias due to all observed covariates. Applications include: matched sampling on the univariate propensity score which is equal percent bias reducing under more general conditions than required for discriminant matching, multivariate adjustment by subclassification on balancing scores where the same subclasses are used to estimate treatment effects for all outcome variables and in all subpopulations, and visual representation of multivariate adjustment by a two-dimensional plot. (Author)
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01 Jan 19495,898 citations
TL;DR: In this paper, the identification of sellers and the discovery of their prices is described as an example of the role of the search for information in economic life, and the identification and discovery of prices of goods and services is discussed.
Abstract: The identification of sellers and the discovery of their prices is given as an example of the role of the search for information in economic life.
3,575 citations
TL;DR: In this paper, the role of buyer search costs in markets with differentiated product offerings is analyzed in the context of an electronic marketplace, and the allocational efficiencies such a reduction can bring to a differentiated market are formalized.
Abstract: Information systems can serve as intermediaries between the buyers and the sellers in a market creating an "electronic marketplace" that lowers the buyers' cost to acquire information about seller prices and product offerings. As a result, electronic marketplaces reduce the inefficiencies caused by buyer search costs, in the process reducing the ability of sellers to extract monopolistic profits while increasing the ability of markets to optimally allocate productive resources. This article models the role of buyer search costs in markets with differentiated product offerings. The impact of reducing these search costs is analyzed in the context of an electronic marketplace, and the allocational efficiencies such a reduction can bring to a differentiated market are formalized. The resulting implications for the incentives of buyers, sellers, and independent intermediaries to invest in electronic marketplaces are explored. Finally, the possibility to separate price information from product attribute information is introduced, and the implications of designing markets promoting competition along each of these dimensions are discussed.
2,366 citations
TL;DR: The authors empirically analyzes the characteristics of the Internet as a channel for two categories of homogeneous products-books and CDs-using a data set of over 8,500 price observations collected over a period of 15 months, comparing pricing behavior at 41 Internet and conventional retail outlets.
Abstract: There have been many claims that the Internet represents a new nearly "frictionless market." Our research empirically analyzes the characteristics of the Internet as a channel for two categories of homogeneous products-books and CDs. Using a data set of over 8,500 price observations collected over a period of 15 months, we compare pricing behavior at 41 Internet and conventional retail outlets.
We find that prices on the Internet are 9-16% lower than prices in conventional outlets, depending on whether taxes, shipping, and shopping costs are included in the price. Additionally, we find that Internet retailers' price adjustments over time are up to 100 times smaller than conventional retailers' price adjustments-presumably reflecting lower menu costs in Internet channels. We also find that levels of price dispersion depend importantly on the measures employed. When we compare the prices posted by different Internet retailers we find substantial dispersion. Internet retailer prices differ by an average of 33% for books and 25% for CDs. However, when we weight these prices by proxies for market share, we find dispersion is lower in Internet channels than in conventional channels, reflecting the dominance of certain heavily branded retailers.
We conclude that while there is lower friction in many dimensions of Internet competition, branding, awareness, and trust remain important sources of heterogeneity among Internet retailers.
2,109 citations