The Unequal Gains from Product Innovations: Evidence from the US Retail Sector

Abstract:

This paper shows theoretically and empirically that, in the context of economic growth and rising income inequality, product innovations disproportionately benefit high-income households due to the supply response to market size effects. Using detailed barcode-level scanner data in the US retail sector from 2004 to 2015, higher-income households are found to systematically experience a larger increase in product variety and a lower inflation rate for continuing products. Annual retail inflation was 0.65 percentage points lower for households earning above $100,000 a year, relative to households making less than $30,000 a year. This finding can be quantitatively explained by the supply response to market size effects: (A) the relative demand for products consumed by high-income households increased because of growth and rising inequality; (B) in response, firms introduced more new products catering to such households; (C) as a result, the prices of continuing products in these market segments were lowered due to increased competitive pressure. Changes in demand plausibly exogenous to supply factors — from shifts in the national income and age distributions over time — are used to provide causal evidence that increasing relative demand leads to more new products and lower inflation for continuing products, implying that the long-term supply curve is downward-sloping. Based on this channel, a model is developed and predicts a secular trend of lower inflation for higher-income households, which is tested and validated using Consumer Price Index and Consumer Expenditure Survey data on the full consumption basket going back to 1953. 

Notes:

Job Market Paper    SSRN                                                                               Press: National Public Radio, Washington Post, New York Times, Marginal RevolutionCenter for Equitable Growth

Last updated on 04/07/2017