The Internet's Demand Cone1 min read

I’ve mentioned the Long Tail (and internet sales) before, and I was
reminded of them again tonight. Couldn’t you rewrite the demand cone
equation suchly:

Total Percieved Cost = t+oc+p


t = monetary transportation costs (whether shipping & handling or gas/bus fare)
oc = opportunity costs for time investments (travel time, search for
the item in question, checkout time, wait for delivery)
p = sticker price

This equation includes the prices of transportation (both in time and
money), and also reflects the time and shipping of items from the
internet. It also illustrates where “t” can become fixed (such as
with Amazon Prime or free/discounted shipping) and the percieved
lowering of “oc” due to improvements in search technology, or the
percieved raise in “oc” due to difficulty navigating a website or web
checkout process.

This model would also reflect the emperical effects noted by free/flat
shipping and the “one click” checkout process (both of which increase
sales of online merchants). It considers time used to learn to use a
computer as sunk costs.

This model also demonstrates why the demand cone for internet
retailers is considerably flat – and vastly larger – than that of a
brick-and-mortar store. This explains the viability of relatively
“niche” products on the internet that you can rarely find in a store
(save in a large metropolis).

The implications are fairly straightforward, and fit right in with all the other long tail implications: niche markets and retailers will practically always increase demand by selling over the internet.

Tags: economics, demand, supply, demand cone, long tail

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