Product Variety, Across-Market Demand Heterogeneity, and the Value of Online Retail

Thomas Quan, Kevin Williams
2018 Social Science Research Network  
This paper quantifies the effect of increased product variety in online markets on consumer welfare and firm profitability. We show the gains may be small if consumer tastes vary geographically and brick-and-mortar stores cater to the local demand. We use an original data set from a large online retailer containing millions of transactions. However, the large choice set leads to many products having zero local market shares. We propose a modification to Berry (1994) and Berry, Levinsohn, Pakes
more » ... 1995) , where both national and local market shares are used to recover geographically varying mean utilities. Our two step approach is easy to implement and fits our data well. Our results indicate that products face substantial heterogeneity in demand across geographic markets, with more niche products facing greater heterogeneity. Failing to account for across-market heterogeneity overstates the consumer welfare gain from increased online product variety. On the supply side we find traditional retail chains can generate a substantial increase in revenue by localizing assortments. * Authors: quanx039@umn.edu and kevin.williams@yale.edu. We are very grateful to the anonymous online retailer for allowing us to gather the data set used in this paper. We thank Amit Gandhi, Thomas Holmes, Kyoo il Kim, Amil Petrin, and Joel Waldfogel for useful comments. We also thank the Minnesota Supercomputing Institute (MSI) for providing computational resources.
doi:10.2139/ssrn.3192621 fatcat:hpkogvapazdujfwr4ytd3hzka4