Faculty Details

Photo of Michael D. Smith

Michael D. Smith

Professor of Information Technology and Marketing, Heinz College and Tepper School of Business


Email: mds@cmu.edu
Personal Website

Biography

Michael D. Smith is a Professor of Information Technology and Marketing at Carnegie Mellon University. He received his Bachelors of Science in Electrical Engineering (summa cum laude) and his Masters of Science in Telecommunications Science from the University of Maryland, and received his Ph.D. in Management Science and Information Technology from the Sloan School of Management at MIT.

Professor Smith's research uses economic and statistical techniques to analyze firm and consumer behavior in online markets — specifically markets for digital information and digital media products. His research in this area has been published in leading Management Science, Economics, and Marketing journals and covered by professional journals including The Harvard Business Review and The Sloan Management Review and press outlets including The Economist, The Wall Street Journal, The New York Times, Wired and Business Week.

Professor Smith has received several awards for his teaching and research including the National Science Foundation’s prestigious CAREER Research Award, the 2009 and 2004 Best Teacher Awards in Carnegie Mellon’s Masters of Information Systems Management program, the best published paper award runner-up for Information Systems Research in 2006, and best paper nominations at the International Conference on Information Systems and the Hawaii International Conference on Systems Sciences. He was also recently selected as one of the top 100 “emerging engineering leaders in the United States” by the National Academy of Engineering. Professor Smith currently serves as a Senior Editor at Information Systems Research, and has previously served as an Associate Editor at Management Science and Management Information Systems Quarterly.

Prior to receiving his Ph.D., Professor Smith worked extensively in the telecommunications and information systems industries, first with GTE in their laboratories, telecommunications, and satellite business units and subsequently with Booz Allen and Hamilton as a member of their telecommunications client service team. While with GTE, Professor Smith was awarded a patent for research applying fuzzy logic and artificial intelligence techniques to the design and operation of telecommunications networks

Selected Publications

Liu, Charles, Esther Gal-Or, Chris Kemerer, Michael D. Smith. 2011. Compatibility and Proprietary Standards: The Impact of Conversion Technologies in IT-Markets with Network Effects. Information Systems Research, 22(1) 188-207.

Brynjolfsson, Erik, Yu Hu, Michael D. Smith. 2010. Long Tails and Superstars: The Effect of IT on Product Variety and Sales Concentration Patterns. Information Systems Research 20th Anniversary Special Issue, 21(4) 736-747.

Danaher, Brett, Samita Dhanasobhon, Michael D. Smith, Rahul Telang. 2010. Converting Pirates without Cannibalizing Purchasers: The Impact of Digital Distribution on Physical Sales and Internet Piracy. Marketing Science, 29(6) 1138-1151.

Smith, Michael, Rahul Telang. 2009. Competing with Free: The Impact of Movie Broadcasts on DVD Sales and Internet Piracy. Management Information Systems Quarterly, 33(2) 312-338.

Ghose, Anindya, Michael D. Smith, Rahul Telang. 2006. Internet Exchanges for Used Books: An Empirical Analysis of Product Cannibalization and Welfare Impact. Information Systems Research, 17(1) 3-19.

Brynjolfsson, Erik, Yu “Jeffrey” Hu, Michael D. Smith. 2006. From Niches to Riches: The Anatomy of the Long Tail. Sloan Management Review, 47(4 Summer) 67-71.

Asvanund, Atip, Karen Clay, Ramayya Krishnan, Michael D. Smith. 2004. An Empirical Analysis of Network Externalities in Peer-To-Peer Music Sharing Networks. Information Systems Research, 15(2) 155-174.

Brynjolfsson, Erik, Yu Hu, Michael Smith. 2003. Consumer Surplus in the Digital Economy: Estimating the Value of Increased Product Variety. Management Science, 49(11) 1580-1596.

Brynjolfsson, Erik, Michael Smith. 2000. Frictionless Commerce? A Comparison of Internet and Conventional Retailers. Management Science 46(4) 563-585.

Education


Ph.D., Management Science, Massachusetts Institute of Technology

Working Papers


Converting Pirates without Cannibalizing Purchasers: The Impact of Digital Distribution on Physical Sales and Internet Piracy

With the rise of Napster, BitTorrent, and other tools facilitating Internet piracy, rights holders have understandably become very concerned with the development of strategies to mitigate the impact of piracy on sales. These tools fall into three general categories: litigation, countermeasures, and competition. The literature has addressed the effectiveness of the first two anti-piracy strategies. In this paper we address the third strategy using NBC’s decision to remove its content from Apple’s iTunes store in December 2007 as a natural shock to the legitimate supply of digital content. To address this question we collect two large datasets from Mininova and Amazon.com documenting the levels of piracy and DVD sales for both NBC and other major networks’ content around this event. We then analyze this data in a difference-in-difference model and find that NBC’s decision to remove its content from iTunes is causally associated with a 19.99% increase in the demand for NBC's pirated content. This is roughly equivalent to an increase of 92,612 downloads a day for NBC’s content. Moreover, we see no change in demand for NBC’s DVD content associated with this change.

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All Reviews Are Not Created Equal: The Dissagregate Impact of Reviews and Reviewers at Amazon.com

Online product review networks play an important role in Internet commerce by transmitting information that customers can use to evaluate physical products in a digitally mediated marketplace. These networks frequently include an explicit social component allowing consumers to view both how community members have rated individual product reviews and the social status of individual reviewers. Moreover, the prior literature has not analyzed the impact of these social cues on consumer behavior, focusing instead on the impact of aggregate review ratings. This work extends this prior work by analyzing how these social factors impact consumer responses to disaggregate review information. To do this, a new dataset collected from Amazon.com’s customer reviews of books is used. This dataset allows to control for the degree to which other community members found the review helpful, and the reputation of the reviewer in the community.

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Service Adoption and Pricing of Content Delivery Network (CDN) Services

Content Delivery Networks (CDNs) are a vital component of the Internet’s content delivery value chain, servicing nearly a third of the Internet’s most popular content sites. However, in spite of their strategic importance little is known about the optimal pricing policies or adoption drivers of CDNs. We address these questions using analytic models of the market structure for Internet content delivery. This paper finds that, consistent with industry practices, CDNs should provide volume discounts to content providers when traffic burstiness is similar across content providers. However, when different content providers have varying traffic burstiness, as expected in reality, CDNs should provide relatively lower volume discounts, even leading to convex price functions in some cases. Surprisingly, it is also found that content providers with bursty traffic provision less infrastructure compared to those with lower burstiness, that CDNs are able to charge more in the presence of bursty traffic, and that content providers with bursty traffic realize lower surplus. Similarly, it is found that a pricing policy that accounts for both the mean and variance in traffic such as percentile- based pricing does better than pure volume based pricing. Finally, it is shown that larger CDN networks can charge higher prices in equilibrium, strengthening any technology-based economies of scale.

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Search and Product Differentiation at an Internet Shopbot

Price dispersion among commodity goods is typically attributed to consumer search costs. This paper explores the magnitude of consumer search benefits and costs using a data set obtained from a major Internet shopbot. For the median consumer, the benefits to searching lower screens are $6.55 while the cost of an exhaustive search of the offers is a maximum of $6.45. This paper also estimates price elasticities and find that they are relatively high compared to offline markets, with a decrease in demand of 7 to 10 percent for each percentage increase in price, in the base model. Interestingly, in this setting, consumers who search more intensively are less price sensitive than other consumers, reflecting their increased weight on retailer differentiation in delivery time and reliability. The results demonstrate that even in this nearly-perfect market of the shopbot, substantial price dispersion can exist in equilibrium from consumers preferences over both price and non-price attributes.

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The Impact of Shopbots on Electronic Markets

Internet shopbots are automated tools that allow customers to easily search for prices and product characteristics from online retailers. Some market observers have predicted that shopbots will benefit consumers at the expense of retailers. In this view, shopbots will radically reduce consumer search costs, reduce retailer opportunities to differentiate their products, and as a result will drive retailer margins toward zero. However, a review of the literature suggests that, while shopbots may place pressure on retailer margins in some circumstances, retailers retain numerous opportunities to differentiate their products, leverage brand names, set strategic prices, and reduce the effectiveness of consumer search at shopbots. The paper closes by identifying significant questions for future research.
 

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The Law of One Price? The Impact of IT-Enabled Markets on Consumer Search and Retailer Pricing

Recent IT research has analyzed how the performance of IT-enabled markets may differ from conventional markets. This literature has made two unexpected empirical findings. First, ITenabled markets for commodity goods exhibit significant price dispersion. Second, well-known retailers in these markets appear to cooperate to set high prices. This paper presents an analytic model, and confirmatory empirical evidence, that explains this behavior as a response to the unique characteristics of consumer search in electronic markets. In conventional markets, consumer search costs are primarily a function of the consumer’s physical proximity to retailer outlets - and physical proximity is distributed relatively equally across retailers. In electronic markets, consumer search costs are primarily a function of the consumer’s mental awareness of different retailers - and this awareness is likely to be concentrated in the hands of a few retailers. Based on this model of consumer search, IT-enabled markets for commodity goods exhibit high price dispersion in equilibrium and a few well-known retailers are able to cooperate to set high prices. The predictions of the model are shown to be consistent with empirical data for 23,744 books collected from 24 Internet retailers in late 1999. Viewing consumer search in this manner provides a useful starting point for understanding the likely development of IT-enabled markets, and for understanding the importance of advertising and first-mover advantage for electronic market participants.

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Consumer Decision-making at an Internet Shopbot: Brand Still Matters

Over the coming century, computer technology is likely to become capable of reproducing many of the skills now performed by human labor. This paper describes three models of the aggregate economic changes that occur when capital becomes capable of performing human work skills. The basic model, with a single sector and homogeneous labor, projects output growth rates over the next few decades that are substantially above historical growth rates in industrialized countries, assuming plausible increases in computer skill. The projected output growth is accompanied by structural changes reflecting the reduced role of labor, with wage growth lagging output growth and the labor share of output decreasing. Resource limits do not substantially affect the levels of output and wage growth in the near future. The 2-type model, with fixed skill differences between different workers, produces similar growth in output and average wages over the next several decades. However, the worker skill differences produce large increases in wage inequality between types of workers. The 2-sector model, with different skill requirements for different economic sectors, also produces similar growth in output and wages over the next several decades. For the three models, asymptotic growth in output and wages is substantially reduced by resource limits, worker skill differences, and sector skill differences, even though those constraints do not substantially reduce growth over the next few decades. The models produce patterns of change in the labor share and capital-output ratio that are consistent with broad trends in economic data.
 

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Frictionless Commerce? A Comparison of Internet and Conventional Retailers

There have been many claims that the Internet represents a new nearly "frictionless market." Our research empirically analyzes the characteristics of the Internet as a channel for two categories of homogeneous products-books and CDs. Using a data set of over 8,500 price observations collected over a period of 15 months, we compare pricing behavior at 41 Internet and conventional retail outlets. It is found that prices on the Internet are 9-16% lower than prices in conventional outlets, depending on whether taxes, shipping, and shopping costs are included in the price. Additionally, it is found that that Internet retailers’ price adjustments over time are up to 100 times smaller than conventional retailers’ price adjustments-presumably reflecting lower menu costs in Internet channels. Also found that that levels of price dispersion depend importantly on the measures employed. When comparing the prices posted by different Internet retailers, substantial dispersion is found. Internet retailer prices differ by an average of 33% for books and 25% for CDs. However, when these prices are weighed by proxies for market share, it is found that dispersion is lower in Internet channels than in conventional channels, reflecting the dominance of certain heavily branded retailers.



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Understanding Digital Markets:Review and Assessment

As the Internet develops into a robust channel for commerce, it will be important to understand the characteristics of electronic markets. Businesses, consumers, government regulators, and academic researchers face a variety of questions when analyzing these nascent markets. Will electronic markets have less friction than comparable conventional markets? What factors lead to dispersion in Internet prices? What are the major electronic commerce developments to watch in the coming years? This paper addresses these questions by reviewing current academic research, discussing the implications of this research, and proposing areas for future study. The paper reviews evidence that Internet markets are more efficient than conventional markets with respect to price levels, menu costs, and price elasticity. However, several studies find substantial and persistent dispersion in prices on the Internet. This price dispersion may be explained, in part, by heterogeneity in retailer-specific factors such as trust and awareness. In addition, the paper notes that Internet markets are still in an early stage of development and may change dramatically in the coming years with the development of cross-channel sales strategies, infomediaries and shopbots, improved supply chain management, and new information markets.
 

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