Preference Minorities and the Internet

Abstract

Offline retailers face trading area and shelf space constraints, so they offer products tailored to the needs of the majority. Consumers whose preferences are dissimilar to the majority—”preference minorities”—are underserved offline and should be more likely to shop online. The authors use sales data from Diapers.com , the leading U.S. online retailer for baby diapers, to show why geographic variation in preference minority status of target customers explains geographic variation in online sales. They find that, holding the absolute number of the target customers constant, online category sales are more than 50% higher in locations where customers suffer from preference isolation. Because customers in the preference minority face higher offline shopping costs, they are also less price sensitive. Niche brands, compared with popular brands, show even greater offline-to-online sales substitution. This greater sensitivity to preference isolation means that these brands in the tail of the long tail distribution draw a greater proportion of their total sales from high–preference minority regions. The authors conclude with a discussion of implications for online retailing research and practice.

How Is the Mobile Internet Different? Search Costs and Local Activities

“…After nearly two decades of research on the economic consequences of the Internet, two findings have consistently appeared in the literature: the Internet can overcome geographic isolation (Balasubramanian 1998, Forman et al 2009, Choi and Bell 2011 and search costs are lower online (Bakos 1997, Baye et al 2009. The geographic isolation results emphasize both physical travel costs and spatial dimensions of preferences.…”

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“…Sun (2011) shows that product ratings are more informative for niche consumers when presented together with the variance of ratings, as is frequently the case in online retail. Choi and Bell (2011) argue that e-commerce attracts preference minorities who are not well served by brick and mortar stores due to the constraints of physical distribution.…”

Harbingers of Failure

“…Offline retailers tend to allocate their scarce shelf space to the dominant preferences in that market, so customers whose preferences are not representative may not find products that suit their needs (Anderson 1979;Waldfogel 2003). Choi and Bell (2011) show that, as a result, preference minorities are more likely to purchase from the Internet, and are less price sensitive when doing so (see also Brynjolfsson, Hu and Rahman 2009). Preference minorities also help to explain why we see a longer tail of niche items purchased in Internet channels, compared to other retail channels (Brynjolfsson, Hu and Smith 2003;Brynjolfsson, Hu and Simester 2011).…”