Consumer surplus in the digital economy: Estimating the value of increased product variety at online booksellers

Headnote

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 catalog, recommend, and provide a large number of products for sale. For example, the number of book titles available at Amazon.com is more than 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 between 7 and 10 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.

(Consumer Surplus; Product Variety; Electronic Commerce; Welfare; Internet)

1. Introduction

Clearly, new goods are at the heart of economic progress. But that realization is only the beginning of an understanding of the economics of new goods. The value created by new goods must somehow be converted into an exact quantitative measure... . (Timothy F. Bresnahan and Robert J. Gordon 1997, p. 1)

The Internet is providing access for people who just can't find the book they are looking for in a store. (Nora Rawlinson, editor of Publishers Weekly, quoted Lyster 1999, p. A6.)

Information technology (IT) facilitates the delivery of many new products and services across electronic networks. As these electronic networks develop and mature, it will be important to quantify their value for customers, merchants, shareholders, and society. While much of the attention in academic research and in the press has been on the relative operational efficiency of the online channel versus traditional channels, we believe that important benefits lie in new products and services...