Measuring Benefits from New Products in Markets with Information Frictions

Research output: Contribution to journalArticlepeer-review

Abstract

I study how much consumers benefit from new products in markets with information frictions. I analyze new products in the U.S. hard drive market, which is characterized by ample product innovation. Using unique click-stream data, I measure the magnitude of two frictions, category consideration and costly search, and show that both play a crucial role in shaping consumer demand. To estimate consumer surplus from new products, I develop a search model that captures both frictions and propose a novel Bayesian estimation method to recover its parameters. I then show that ignoring information frictions leads researchers to underestimate the consumer surplus from new hard drives because it appears that consumers do not value the combinations of attributes these hard drives offer. Partly eliminating frictions, through marketing efforts or market-wide transparency initiatives, can help consumers to more fully internalize the benefits of new product launches.

Original languageEnglish (US)
Pages (from-to)6988-7008
Number of pages21
JournalManagement Science
Volume69
Issue number11
DOIs
StatePublished - 2023

Keywords

  • Bayesian analysis
  • consumer search
  • new products
  • value of innovation

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

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