Long Tails and Localized Increasing Returns
33 Pages Posted: 25 Sep 2008
Date Written: September 24, 2008
Abstract
In this paper, I develop a simple model of consumer choice that demonstrates why a market with increasing returns may not converge to a winner-take-all outcome and can even support a "Long Tail" of small share products. Consumers choose products by first limiting their choice to a subset of options in order to satisfy product characteristic requirements or to reduce the information costs of their decision, and then selecting from this feasible set based on a combination of individual preferences and increasing returns to sales. The critical factor in determining the shape of the market share distribution is the distribution of feasible set sizes. In most cases, the resulting distribution of shares follows a power law. The implications of the model for market efficiency and predictability are also examined.
Keywords: increasing returns, Long Tail, market structure, power law
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