Goodbye Pareto Principle , Hello Long Tail : The Effect of Search Costs on the Concentration of Product Sales This version : January 2011

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 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. We thank Chris Anderson, Jerry Hausman, Lorin Hitt, Hank Lucas, Jiwoong Shin, Hal Varian, Pai-Ling Yin, seminar participants at Carnegie Mellon University, New York University, Purdue University, University of Minnesota, University of Pennsylvania, Yale University, the Workshop on Information Systems and Economics (WISE), and the American Economic Association Annual Meeting (AEA) as well as the review team at Management Science for valuable comments on this paper. Generous funding was provided by the MIT Center for Digital Business and NSF Grant IIS-0085725. * MIT Sloan School of Management and the National Bureau of Economic Research; email: [email protected]; web: http://digital.mit.edu/erik ** Purdue University, Krannert School of Management; email: [email protected] *** MIT Sloan School of Management; email: [email protected]