Goodbye Pareto Principle, Hello Long Tail: The Effect of Search Costs on the Concentration of Product Sales
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
Massachusetts Institute of Technology (MIT) - Sloan School of Management
January 1, 2011
Management Science, Forthcoming
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.
Number of Pages in PDF File: 32
Keywords: search cost, product variety, concentration, long tail, Internet, electronic commerce
Date posted: December 26, 2006 ; Last revised: June 19, 2014