Economics of Digitization

March 8, 2013
Shane Greenstein of Northwestern University's Kellogg School of Management, Josh Lerner of the Harvard Business School, and Scott Stern of MIT's Sloan School of Management, Organizers

Miguel Godinho de Matos, Catolica Lisbon, and Pedro Ferreira, Rahul Telang, and Michael Smith, Carnegie Mellon University

The Impact of Popularity on the Sales of Movies in Video-on-Demand: a Randomized Experiment

Godinho de Matos, Ferreira, Telang, and Smith design and implement a randomized experiment to determine the role that popularity plays on the sales of movies over VoD. They use the VoD system of a large telecommunications provider during half a year in 2012. The popularity of a movie in this system is encoded by the slot in which the movie is displayed on the TV screen. Movies with more likes are shown farthest to the left. During the experiment, movies were primarily placed in their true slot and shown along with their true number of likes. At random moments, some movies were swapped and thus displayed our of order and with a fake number of likes. The movies that were swapped were selected at random. The authors find that promoting a movie by one slot increases weekly sales by 4 percent on average. A movie promoted (demoted) to a fake slot sells 15.9 percent less (27.7 percent more) than a true movie placed at that slot, on average across all manipulations introduced. This asymmetry is related to the amount of information publicly available about the movies manipulated. More well known movies are less sensitive to manipulations. Also, a movie promoted (demoted) to a fake slot receives 33.1 percent fewer (30.1 percent more) likes than a true movie at that slot. Therefore, manipulated movies tend to move back to their true slot over time. Hence, self-fulfilling prophecies are hard to sustain in a market in which goods are costly and sufficiently well known. During this adjustment process, the provider enjoys increased profits while subscribers lose welfare. This process is likely to converge quickly, which might lead the provider to promote different movies over time.

Garrett Johnson, Northwestern University, and Randall Lewis and David Reiley, Jr., Google, Inc.

Location, Location, Location: Proximity and Repetition Increase Effectiveness of Display Ads in Controlled Experiments

Yahoo! Research partnered with a nationwide retailer to study the effectiveness of display advertising on online and in-store sales among more than three million shared customers. Johnson, Lewis, and Reiley measure the impact of higher ad impression frequency using a simple experimental design based on this experiment: users in the "Full" treatment group see the retailer's ads; users in the control group see unrelated "control" ads; and users in an intermediate ("Half") treatment group see an equal probability mix of the retailer's and control ads. They find that the retailer's ads statistically significantly increase sales relative to the control group. Doubling the average number of impressions per person, from 17 to 34 in a two-week period, nearly doubles the treatment effect. Restricting attention to the 80 percent of consumers who saw no more than 50 ads in two weeks, and imposing some additional structure, they find that the ad effectiveness is approximately linear in the number of ads: each ad impression raises revenue by approximately $0.04 during the campaign. The ads also have a statistically significant effect during the two weeks after the campaign ends, for a total revenue effect of $0.06 per impression over four weeks. There is also evidence that the ads most strongly affected those customers who live closest to the retailer's brick- and- mortar locations: those who live within two miles of a store experience more than three times the incremental sales lift because of ads as those who live farther away.

Ruben Enikolopov, Maria Petrova, and Konstantin Sonin, New Economic School

Do Political Blogs Matter? Corruption in State-controlled Companies, Blog Postings, and DDoS Attacks

Though new media has become a popular source of information, it is less clear whether or not it has a real impact on economic activity. In authoritarian regimes, where the traditional media are not free, this potential impact might be especially important. Enikolopov, Petrova, and Sonin study consequences of blog postings of a popular Russian anti-corruption blogger, Alexei Navalny, on the stock prices of state-controlled companies.They find a negative effect of company-related blog postings on both within-day 5-minute returns and daily abnormal returns. Using precise timing of blog postings and news from newswires, they reject the hypothesis that the effect of blog postings is driven by events preceding the postings. They also find that there are long-term effects of the most important posts on stock returns, trading volume, and volatility. The effect is decreasing in attention to posts of other top bloggers, increasing in visitors' attention to Navalny's posts, and is consistent with more pronounced individual, rather than institutional trading. To address potential endogeneity problems, they use distributed denial-of-services (DDoS) attacks targeted to other people's blogs as a source of exogenous variation that negatively affects blog postings, but is uncorrelated with other determinants of asset prices. They find a substantial positive effect of the DDoS attacks on abnormal returns of the companies Navalny wrote about, while placebo tests suggest that DDoS attacks themselves do not have any independent effect on stock performance. Overall, the evidence suggests that blog postings about corruption in state-controlled companies can have a negative causal impact on stock performance of these companies.

Peter DiCola, Northwestern University

Money from Music: Survey Evidence on Musicians' Revenue and Lessons about Copyright Incentives

Using data from an original survey of over 5,000 musicians nationwide -- who are quite diverse in terms of their genre, income bracket, demographics, education, and many other variables -- DiCola focuses on how the mix of revenue sources varies across musicians, especially by genre and income bracket. He categorizes revenue sources in terms of their relationship to copyright law, classifying money from compositions and recordings as directly related to copyright and revenue from live concerts, teaching, or other sources as having either an indirect relationship to copyright law or no relationship. Using this categorization, he finds that composers and musicians in the top income brackets depend heavily on revenue that is directly related to copyright protection, but the vast majority of other musicians do not. For most musicians, copyright does not provide much of a direct financial reward for what they are producing currently. Instead, the survey findings are consistent with a winner-take-all or superstar model in which copyright motivates musicians through the promise of large rewards in the future in the rare event of wide popularity.

Tom Blake and Steven Tadelis, eBay Research Labs, and Chris Nosko, University of Chicago

Consumer Heterogeneity and Paid Search Effectiveness: A Large Scale Field Experiment

Internet advertising has been the fastest growing advertising channel in recent years with paid advertisements on search platforms (for example, Google and Bing) comprising the bulk of this revenue. Blake, Tadelis, and Nosko present results from a series of large-scale field experiments done at eBay that are designed to detect the causal effectiveness of paid search advertisements. Results show that brand-keyword ads have no short-term benefits, and that returns from all other keywords are a fraction of conventional estimates. The researchers find that new and infrequent users are positively influenced by ads but that existing loyal users whose purchasing behavior is not influenced by paid search account for most of the advertising expenses, resulting in average returns that are negative. They discuss substitution to other channels and implications for advertising decisions in large firms.

Joel Waldfogel, University of Minnesota and NBER, and Imke Reimers, University of Minnesota

Storming the Gatekeepers: Digital Disintermediation in the Market for Books

Digitization is transforming the market for books. Lower marginal costs have reduced prices by 10-15 percent in the past four years, and digitization has given creators the ability to circumvent traditional gatekeepers and publish their work directly. The number of self-published works has grown by almost 300 percent since 2006 and now exceeds the number of traditionally published works. Given the inherent difficulty in predicting the ex post appeal of creative products at the time of investment, a growth in available new products can substantially expand the appeal of available products. While e-book data are not systematically available, Waldfogel and Reimers are able to document that falling prices have increased consumer surplus by $2-3 billion per year. Using bestseller lists in conjunction with title-level data on physical sales and their best estimates of e-book sales, they document that many self-published books have substantial ex post appeal to consumers. Works that began their commercial lives through self-publishing began to appear on bestseller lists in 2011 and by late 2012 such works accounted for a tenth of both bestseller listings and estimated unit sales. In romantic fiction, self-published works account for almost a third. These changes challenge the role of gatekeepers while benefiting consumers.

Avi Goldfarb and Brian Silverman, University of Toronto; Ryan McDevitt, University of Rochester; and Sampsa Samila, National University of Singapore

The Effect of Social Interaction on Economic Transactions: An Embarrassment of Niches?

Goldfarb, McDevitt, Silverman, and Samila show that social interaction reduces the diversity of products purchased by consumers in two retail settings. First,thwye consider a field experiment conducted by Sweden's monopoly alcohol retailer and find that moving purchases from behind the counter to self-service disproportionately increases the sales of difficult-to-pronounce products. Second, they use individual-level panel data from a pizza delivery restaurant to show that online orders have more complexity and more calories, which increases both consumer and producer surplus. Combined, these results suggest that social frictions can substantially affect market outcomes, perhaps because of consumers' fear of embarrassment.

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