Learning About Demand in the Long-tail: The Role of Competitive Monitoring

Most e-commerce retailers offer a long-tail of very low demand products. Individually, these items may have low sales but collectively they are critical to the overall e-commerce business model. Because of their minimal sales, a challenge that retailers face is learning about the best price for these products. The academic literature has considered price exploration as a primary source of learning about demand. In this paper, we show that monitoring competitor prices leads to learning about price levels and is associated with future demand and revenue among long-tail products. We show that price exploration and competitive monitoring are substitutes with respect to learning about demand. As demand signals are sparse in the long-tail, we find that monitoring the largest competitor leads to substantial learning about demand. We show that past monitoring of competitors' prices is associated with more future demand than high frequency price exploration among long tail products.