A study of the Pareto Principle and the Internet’s “Long Tail” phenomenon by MIT Sloan Professors Erik Brynjolfsson and Duncan Simester recently earned the duo a prestigious award—and reveal results that point to a shift in the distribution of product sales.
The big data experts won the 2013 Management Science Best Paper Award sponsored by the INFORMS (Institute for Operations Research and the Management Sciences) Information Systems Society. The award recognizes the best contribution to the theory and practice of information systems among papers published in Management Science in the previous three years. The winning paper, "Goodbye Pareto Principle, Hello Long Tail: The Effect of Search Costs on the Concentration of Product Sales,” is co-authored with Jeffrey Hu (a PhD graduate of Sloan’s IT group, now at Georgia Tech’s Scheller College of Business).
Many markets have historically been dominated by a small number of best-selling products. The Pareto principle, also known as the 80/20 rule, describes this common pattern of sales concentration. However, information technology in general and Internet markets in particular have the potential to substantially increase the collective share of niche products, thereby creating a longer tail in the distribution of sales.
This award-winning paper by Brynolfsson and Simester investigates the Internet's long tail phenomenon. By analyzing data collected from a multichannel retailer, the authors theorize that by increasing the supply of niche products that are unavailable through traditional channels, Internet commerce may boost the share of sales generated from these niche products. In addition, they say the Internet’s ability to allow consumers to acquire product information more conveniently and at a lower cost also leads to increased demands for niche products—ultimately leading to changes in consumer purchasing patterns.
The authors say the findings suggest that product sales will become less concentrated, shifting the balance from a few best-selling products to niche products, which could have significant implications for the future evolution of business strategies. In turn, they say this phenomenon could have a profound impact on a firm’s product development strategy, operations strategy, and marketing strategy.
Erik Brynolfsson is Schussel Family Professor of Management Science, Professor of Information Technology, and Director of The MIT Center for Digital Business at MIT Sloan. He teaches in the MIT Sloan Executive Education program, Big Data: Making Complex Things Simpler as well as the Advanced Management Program (AMP).
Duncan Simester is the Nanyang Technological University Professor and Professor of Marketing at MIT Sloan. He teaches in the MIT Sloan Executive Education programs, Driving Strategic Innovation: Achieving High Performance Throughout the Value Chain and Strategic Marketing for the Technical Executive, as well as the Global Executive Academy and the Advanced Management Program (AMP).