Eric Clemons, a professor at the Wharton School, is an aficionado of Dogfish Head World Wide Imperial Stout beer at $160 per case. How did Dogfish Head find a customer like him? They didn’t. He found them. Clemons was not always a connoisseur of rare beers, but after trying Victory Hop Devil beer, the top-ranked India pale ale at the time, he learned of Dogfish Head, as well as Victory’s Storm King Imperial Stout and other niche beers, through the Internet. Clemons notes that he “would never have bought the Dogfish Head without the reviews on ratebeer.com and without the chain of experiences with ever-more interesting beers along the way.”
For most of the past century, companies of all types strove to introduce products and services that were blockbuster hits and could capture the mass market. Bigger was better. But now dozens of markets, from beer to books, music to movies, and software to services of all types are in the early stages of a revolution as the Internet and related technologies vastly expand the variety of products that can be produced, promoted and purchased. Though based on a simple set of economic and technological drivers, the implications of this are far-reaching for managers, consumers and the economy as a whole.
Early discussions of Internet markets focused on how “frictionless commerce” would lead to fierce price competition online. However, while consumers certainly do benefit from lower prices online, our research indicates that they derive far more value from another important characteristic of Internet markets: the ability of online merchants to help consumers locate, evaluate and purchase a far wider variety of products than they can via traditional brick-and-mortar channels.1 (See “About the Research.”)
1. In contrast to early predictions of commoditization and pure price competition, academic studies have found that price dispersion is often higher online than in brick-and-mortar stores (see E. Brynjolfsson and M.D. Smith, “Frictionless Commerce? A Comparison of Internet and Conventional Retailers,” Management Science 46, no. 4 [April 2000]: 563–585), and have highlighted the importance of search (Y. Bakos, “The Emerging Role of Electronic Marketplaces on the Internet,” Communications of the ACM 41, no. 8 : 35–42) and brand and loyalty in Internet markets (M.D. Smith and E. Brynjolfsson, “Customer Decision-making at an Internet Shopbot: Brand Still Matters,” Journal of Industrial Economics 49, no. 4 : 541–558).
2. See the authors’ paper, “Consumer Surplus in the Digital Economy: Estimating the Value of Increased Product Variety at Online Booksellers,” Management Science 49, no. 11 (November 2003): 1580–1596.
3. See, for example, C. Anderson’s October 2004 article on “The Long Tail” in Wired Magazine, October 2004, his forthcoming book of the same name and his blog at http://www.longtail.com/. Wikipedia, the online encyclopedia, itself an example of the Long Tail in action, has a detailed article on the topic.
4. E. Brynjolfsson, Y. Hu and D. Simester, “Goodbye Pareto Principle, Hello Long Tail,” working paper, MIT Center for eBusiness, Cambridge, Massachusetts.
5. “U.S. Book Production Reaches New High of 195,000 Titles in 2004; Fiction Soars,” Bowker press release, May 24, 2005. http:// www.bowker.com/press/bowker/2005_0524_bowker.htm.
6. J. Leeds, “The New Is a Boon for Indie Labels,” The New York Times, December 27, 2005.
7. J.A. Chevalier and D. Mayzlin, “The Effect of Word of Mouth on Sales: Online Book Reviews,” working paper ES-28 and MK-15, Yale School of Management, New Haven, Connecticut, August 6, 2003.
8. See, for instance, M. Van Alstyne and E. Brynjolfsson, “Global Village or CyberBalkans: Modeling and Measuring the Integration of Electronic Communities,” Managment Science 51, no. 6 (June 2005): 851–868.