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

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, by greatly lowering search costs, 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 how demand-side factors contribute to the Internet's ¿Long Tail¿ phenomenon. It first models how a reduction in search costs will affect the concentration in product sales. Then, by analyzing data collected from a multi-channel retailing company, it provides empirical evidence that the Internet channel exhibits a significantly less concentrated sales distribution, when compared with traditional channels. The difference in the sales distribution is highly significant, even after controlling for consumer differences. Furthermore, the effect is particularly strong for individuals with more prior experience using the Internet channel. We find evidence that Internet purchases made by consumers with prior Internet experience are more skewed toward obscure products, compared with consumers who have no such experience. We observe the opposite outcome when comparing purchases by the same consumers through the catalog channel. If the relationships we uncover persist, the underlying trends in technology and search costs portend an ongoing shift in the distribution of product sales.

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

Working Paper Series