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

Management Science, Forthcoming

32 Pages Posted: 26 Dec 2006 Last revised: 19 Jun 2014

Erik Brynjolfsson

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

Duncan Simester

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: January 1, 2011

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 multi-channel 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 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.

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

Suggested Citation

Brynjolfsson, Erik and Hu, Yu Jeffrey and Simester, Duncan, Goodbye Pareto Principle, Hello Long Tail: The Effect of Search Costs on the Concentration of Product Sales (January 1, 2011). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=953587

Erik Brynjolfsson

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E53-313
Cambridge, MA 02142
United States
617-253-4319 (Phone)

HOME PAGE: http://digital.mit.edu/erik

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yu Jeffrey Hu (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

Duncan Simester

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

Management Science
Cambridge, MA 02142
United States
617-258-0679 (Phone)
617-258-7597 (Fax)

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