ABSTRACT
Prior to the widespread retail use of electronic media such as the Internet in the mid-to
late-1990s, one of the primary methods firms used to meet the needs of consumers was to
divide the overall heterogeneous market into smaller, homogeneous segments, with the
goal being more precise satisfaction of individual wants and needs (Smith, 1956). Such
efforts resulted in an increase in the availability of products that match consumers’
preferences, but at the cost of offering large, high-variety assortments (Baumol & Ide,
1956). This type of strategy ultimately led to the creation of large “category-killer” stores
such as Best Buy and Circuit City where dozens of product variants are displayed in
order to appeal to a wider range of consumers than possible at much smaller stores that
carry more narrow assortments of products. Although such a strategy makes it more
likely that retailers will carry products that consumers desire, sorting through such large
assortments is extremely effortful for consumers, to the point where the size of the
assortment can create dissatisfaction with the process and can decrease the likelihood that
the consumer will actually select a product consistent with his or her preferences
(Huffman & Kahn, 1998; Keller & Staelin, 1987). In order to better facilitate a match
between consumers’ preferences and firms’ product offerings without increasing the
burden on the consumer, companies have recently begun using new media to implement
collaborative strategies with individuals (Kahn, 1998; Prahalad & Ramaswamy, 2000;
Sheth, Sisodia, & Sharma, 2000), facilitated in large part by the interactive nature of the
Internet, which makes two-way, real-time communication between firms and consumers
economically practical (Hoffman & Novak, 1996). Consistent with this capability, seven
of the top ten Internet retail sites tailor some part of their product offerings to the
preferences of individual consumers, altogether grossing nearly $4 billion in 2000
(National Retail Foundation, 2000).
