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

• Published in: Management science Vol. 57; no. 8; pp. 1373 - 1386
• Main Authors: Brynjolfsson, Erik, Yu (Jeffrey) Hu, Simester, Duncan
• Format: Journal Article
• Language: English
• Published: Hanover, MD INFORMS 01.08.2011; Institute for Operations Research and the Management Sciences
• Series: Management Science
• Subjects: Analysis; Applied sciences; Business orders; Capital costs; Computer science; control theory; systems; Computer systems and distributed systems. User interface; concentration; Consumer goods; Consumers; Costs; Distribution (Economics); Electronic commerce; Exact sciences and technology; Impact analysis; Information systems. Data bases; Information technology; Internet; Internet marketing; Inventory control, production control. Distribution; long tail; Memory organisation. Data processing; Online searching; Operational research and scientific management; Operational research. Management science; Pareto optimum; Pareto principle; Product management; product sales; product variety; Recommendations; Recommender systems; Reliability theory. Replacement problems; Rentals; Retail stores; Sales; Sales catalogs; Sales distribution; Sales management; search cost; Software; Studies; Websites; United States; Availability; Costs; Pareto optimum; Information system; Retail marketing; Empirical method; product sales; concentration; Information technology; Recommendation; Product structure; Consumer; Distribution tail; search cost; Electronic trade; Internet; Niche market; Multiple channel; User behavior; electronic commerce; long tail; product variety
• ISSN: 0025-1909; 1526-5501
• DOI: 10.1287/mnsc.1110.1371

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 multichannel 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 that 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. This paper was accepted by Ramayya Krishnan, information systems.