Is Tom Cruise Threatened? An Empirical Study of the Impact of Product Variety on Demand Concentration

Abstract

We empirically examine the impact of expanded product variety on demand concentration using large data sets from the movie rental industry as our test bed. We find that product variety is likely to increase demand concentration, which goes against the “long tail effect” theory predicting that demand will become less concentrated on “hit” products because of expanded product variety. We further provide evidence that this finding is not due to introducing many low-selling niche products, as the intuition might suggest. Instead, we discover that increasing product variety diversifies the demand away from each movie title, but less significantly for hits than for niche products. In particular, we find that increasing product variety by 1,000 titles may increase the Gini coefficient of DVD rentals by 0.0029, which translates to increasing the market share of the top 1% of DVDs by 1.96% and the market share of the top 10% of DVDs by 0.58%. At the same time, the market share of the bottom 1% of DVDs is reduced by 21.29%, while the market share of the bottom 10% of DVDs is reduced by 5.28%. We rule out alternative explanations using a variety of long tail metrics, capturing movie format/distribution channel interaction and customer heterogeneity, while making use of instrumental variables.