Monday, June 2, 2014

Plenty is no Plague, or is it? An Empirical Study of the Impact of Product Variety on Demand Concentration

TAN Tom Fangyun, NETESSINE Serguei, HITT Lorin
Read the working paper
INSEAD Working Paper 2014/44/TOM/ACGRE revised version of 2012/128/TOM/ACGRE

We empirically examine the impact of expanded product variety on demand concentration using two large data sets from the movie rental industry, at both the movie level and the consumer level. We find that product variety increases demand concentration, which goes against the “Long Tail effect” theory predicting that, over time, demand would become less concentrated. We discover that increasing product variety diversifies the demand away from each movie title, but less significantly for hits than for niche products. At the consumer level, we further decompose the effect of increasing product variety into a direct effect and two indirect effects via sampling quantity and satisfaction, all of which seem to contribute to increasing demand concentration. We also assess the implication for consumer welfare in terms of total satisfaction with movies and find that, quite counter-intuitively, reducing product variety may achieve both significantly higher consumer welfare (an estimated 10% increase) and lower supply costs associated with the extra product variety.