Consumer Surplus In The Digital Economy:
...of Technology, Cambridge, Massachusetts 02139
Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139
The Heinz School of Public Policy and Management, Carnegie Mellon University,
Pittsburgh, Pennsylvania 15213
erikb@mit.edu • yuhu@mit.edu • mds@cmu.edu
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...
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