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

We present a framework and empirical estimates that quantify the economic impact of increased product variety made available through electronic markets. Recent research has focused on the effect of increased competition on Internet market efficiency. While these efficiency gains significantly enhance consumer welfare, 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 welfare gains. One reason for increased product variety on the Internet is the ability of online retailers to stock, display, and sell a large number of products. For example, the number of book titles available at Amazon.com is over 18 times larger than the number at a typical Barnes & Noble superstore, and 45 times greater than the number of books available at a typical large independent bookstore. Our analysis indicates that the increased product variety of online bookstores enhanced consumer welfare by $756 million to $971 million dollars in the year 2000, which is at least five 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.