Consumer Surplus in the Digital Economy: Estimating the Value of Increased Product Variety at Online Booksellers
Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)
Yu Jeffrey Hu
Georgia Institute of Technology - Scheller College of Business
Michael D. Smith
Carnegie Mellon University - H. John Heinz III School of Public Policy and Management
June 1, 2003
Management Science, Forthcoming
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 catalog, recommend and 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 between seven to ten 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.
Number of Pages in PDF File: 34
Keywords: Consumer Surplus, Product Variety, Electronic Markets
Date posted: May 8, 2003 ; Last revised: June 9, 2014