Consumer Surplus in the Digital Economy: Estimating the Value of Increased Product Variety at Online Booksellers

Management Science, Forthcoming

34 Pages Posted: 8 May 2003 Last revised: 25 Jan 2017

See all articles by Erik Brynjolfsson

Erik Brynjolfsson

National Bureau of Economic Research (NBER); Stanford

Yu Jeffrey Hu

Purdue University

Michael D. Smith

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management

Date Written: June 1, 2003

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 catalog, recommend and 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 between seven to ten 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.

Keywords: Consumer Surplus, Product Variety, Electronic Markets

Suggested Citation

Brynjolfsson, Erik and Hu, Yu Jeffrey and Smith, Michael D., Consumer Surplus in the Digital Economy: Estimating the Value of Increased Product Variety at Online Booksellers (June 1, 2003). Management Science, Forthcoming, Available at SSRN: https://ssrn.com/abstract=400940 or http://dx.doi.org/10.2139/ssrn.400940

Erik Brynjolfsson (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Stanford ( email )

366 Galvez St
Stanford, CA 94305
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HOME PAGE: http://brynjolfsson.com

Yu Jeffrey Hu

Purdue University ( email )

610 Purdue Mall
West Lafayette, IN 47907
United States

Michael D. Smith

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management ( email )

Pittsburgh, PA 15213-3890
United States

HOME PAGE: http://www.heinz.cmu.edu/~mds

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