Is Tom Cruise Threatened? An Empirical Study of the Impact of Product Variety on Demand Concentration

39 Pages Posted: 14 Dec 2012 Last revised: 23 Nov 2016

Tom Tan

Southern Methodist University (SMU) - Information Technology and Operations Management Department (ITOM)

Serguei Netessine

INSEAD

Lorin M. Hitt

University of Pennsylvania - Operations & Information Management Department

Date Written: November 23, 2016

Abstract

We empirically examine the impact of expanded product variety on demand concentration using large data sets from the movie rental industry as our test bed. We find that product variety is likely to increase demand concentration, which goes against the “Long Tail effect” theory predicting that demand would become less concentrated on “hit” products due to expanded product variety. We further provide evidence that this finding is not due to introducing many low-selling niche products as the intuition might suggest. Instead, we discover that increasing product variety diversifies the demand away from each movie title, but less significantly for hits than for niche products. In particular, we find that increasing product variety by 1,000 titles may increase the Gini coefficient of DVD rentals by 0.0029, which translates to increasing the market share of the top 1% of DVDs by 1.96% and the market share of the top 10% of DVDs by 0.58%. At the same time the market share of the bottom 1% of DVDs is reduced by 21.29% while the market share of the bottom 10% of DVDs is reduced by 5.28%. We rule out alternative explanations using a variety of “Long Tail” metrics, capturing movie format/distribution channel interaction and customer heterogeneity, while making use of instrumental variables.

Keywords: Product Variety, Demand Concentration, Movie Rental, The Long Tail Effect, Product Rating

Suggested Citation

Tan, Tom and Netessine, Serguei and Hitt, Lorin M., Is Tom Cruise Threatened? An Empirical Study of the Impact of Product Variety on Demand Concentration (November 23, 2016). INSEAD Working Paper No. 2016/81/TOM/ACGRE. Available at SSRN: https://ssrn.com/abstract=2188354 or http://dx.doi.org/10.2139/ssrn.2188354

Tom Tan

Southern Methodist University (SMU) - Information Technology and Operations Management Department (ITOM) ( email )

Dallas, TX 75275
United States

Serguei Netessine (Contact Author)

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France
+33 (0)1 60 72 92 25 (Phone)

Lorin M. Hitt

University of Pennsylvania - Operations & Information Management Department ( email )

571 Jon M. Huntsman Hall
Philadelphia, PA 19104
United States
215-898-7730 (Phone)
215-898-3664 (Fax)

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