Virginia Postrel’s latest article, Choice Trumps Price on the Internet examines a recent economic study, Consumer Surplus in the Digital Economy: Estimating the Value of Increased Product Variety at Online Booksellers and its implications:
In the article, the authors, all economists, estimate just how much better off consumers are because of the variety available online. They look specifically at “obscure titles,” books that rank below the top 100,000 in Amazon.com sales and probably would not be carried in a traditional bookstore. (The typical Barnes & Noble or Borders superstore carries about 100,000 titles, while large independent bookstores stock about 40,000.)Using Amazon rankings and publisher data on 324 titles, the researchers determined that nearly half the book sales at Amazon, 46 percent in 2000, were of obscure titles.
They then “tried to calculate what people would have been willing to pay for these books versus what they actually did pay,” Professor Brynjolfsson explained. That’s the concept economists call “consumer surplus.” If you buy an ice cream cone for $2 but would have been willing to pay $5, you get $3 of consumer surplus.
By estimating what the demand curve for books looks like, using well-established techniques, the researchers could estimate the consumer surplus for all buyers in this market.
The results are striking. People are really happy to find obscure books, and would be willing to pay far more for them.
“The consumer surplus was about 70 percent of the purchase price for each book sold,” Professor Brynjolfsson said. “If a book was purchased for $20 on average, consumers would have been willing to pay on average up to $34.”
All those benefits add up to big money — around $1 billion in 2000. By comparison, Amazon’s lower prices saved consumers about $100 million that year.
“So they got about 10 times as much value from the selection as they got from the lower prices and competition,” Professor Brynjolfsson said. “An order of magnitude more value was created from the increased choice and selection.”