Consumer Surplus in the Digital Economy: Estimating the Value of Increased Product Variety at Online Booksellers
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Author(s)
Brynjolfsson, Erik
Smith, Michael D.
Yu, (Jeffrey) Hu
Date Issued
May 23, 2003
Series/Report no.
MIT Sloan School of Management Working Paper;4305-03
Abstract
We present a framework and empirical estimates that quantify the economic impact of
increased product variety made available through electronic markets. While efficiency
gains from increased competition significantly enhance consumer surplus, for instance
by leading to lower average selling prices, our present research shows that increased
product variety made available through electronic markets can be a significantly larger
source of consumer surplus gains.
One reason for increased product variety on the Internet is the ability of online retailers
to provide a large number of products for sale. For example, the number of book titles
available at Amazon.com is over 23 times larger than the number of books on the
shelves of a typical Barnes & Noble superstore and 57 times greater than the number
of books stocked in a typical large independent bookstore.
Our analysis indicates that the increased product variety of online bookstores
enhanced consumer welfare by $731 million to $1.03 billion in the year 2000, which is
at least five times as large as the consumer welfare gain from increased competition
and lower prices in this market. There may also be large welfare gains in other
SKU-intensive consumer goods such as music, movies, consumer electronics, and
computer software and hardware
Subjects
Consumer Surplus
Product Variety
Electronic Markets
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