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LONG TAIL ECONOMICSIMPLICATIONS OF POWER LAW DISTRIBUTIONS
THE LONG TAIL
Sales by sales rank: Blue line for Brick and Mortar Retailers; Red Line, Internet Retailers
LONG TAILS AND POWER LAWS
S = aRk
• S is quantity sold• R is sales rank of individual titles• A log-linear equation: Log S = log(a) + klog(R)
Brick and Mortar Retailers
• Market is limited to local area• Inventory is limited by high probability that low ranking items
will not sell
Internet Retailer
• Market is national or international in scope• Inventory relatively unlimited; even low ranking items likely to
sell
TRADITIONAL RETAILER’S PRODUCTS ACCOUNT FOR ONLY 10% OF ONLINE RETAILER’S INVENTORY, 75% OF REVENUES, 66% OF PROFIT
TRADITIONAL VS. ONLINE RETAILING
For Traditional Music Retail
• New album releases account for 63% of sales in 2005• The top 1000 albums make up almost 80% of sales• At big-box retailers, top 200 account for 90% of sales
For Online Music Retail
• New music accounts for one-third of sales with two-thirds from older “catalog” items
• The top 1000 albums account for less than 33% of sales• Albums beyond the top 5000 account for 50% of sales
POWER LAW OR LONG TAIL MARKETSRequire (Anderson):
• Variety (differentiated products)• Inequality (variations in “quality”)• Network effects that amplify differences
Notice similarity to superstars
• Imperfect substitutability among “goods”• Some sellers (“performers”) are preferred to others• Differentiated products
• Economies of scale in production (realized online)• Costs of production do not rise in proportion to a seller’s market
• Access to a market of large or increasing scope (due to Internet)• Often due to technological change
Online Retailing is a Superstar Phenomenon
ONLINE SUPERSTARS
As online music markets grow
• Total number of retailers declines• Traditional retail has become limited to
• Big-box retailers carrying 4,500 albums or less• Small local “specialty” retailers often selling “used” music as
well as new
Online Retailers expand
• Amazon carries about 500,000 albums (CDs)• iTunes, Amazon, Pandora, Spotify can carry almost unlimited
digital inventory at near zero marginal cost
INFINITE VARIETY?
About 30,000 items 500,000 itemsWalMart ≈ 5,000
POWER LAW SALES DISTRIBUTIONS DISPLAY “SELF-SIMILARITY AT MULTIPLE SCALES”
If S = f(R) = aRk , then f(cR) = a(cR)k = ck(aRk) = ckf(R), where c is a constant.
WHAT MAKES THE LONG TAIL CHANGE?
Anderson
• Increasing market scope (technology)• Network effects and filters or search functions• Niche titles’ sales increase relative to hits
Bentley, et al.
• Random copying behavior with “u” fraction of “innovators”• Produces power law sales distributions • Increasing numbers of “innovators” increases top list turnover
producing a longer tail
REFERENCES
Anderson, Chris. 2006. The Long Tail. Hyperion: New York.
Bentley, R. Alexander, Carl P. Lipo, Harold A. Herzog, and Matthew W. Hahn. 2007. “Regular Rates of Popular Culture Change Reflect Random Copying.” Evolution and Human Behavior, 28, 5-158.