This paper presents a framework and empirical estimates that quantify the economic impact of increased product variety made available through electronic markets. Recent research has focused on the effect of increased competition on Internet market efficiency. While these efficiency gains significantly enhance consumer welfare, for instance by leading to lower average selling prices, our present research shows that increased product variety made available through electronic markets can be a significantly larger source of consumer welfare gains. One reason for increased product variety on the Internet is the ability of online retailers to stock, display, and sell a large number of products. There may also be large welfare gains in other SKU-intensive consumer goods such as music, movies, consumer electronics, and computer software and hardware.
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