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


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. 


Revise and Resubmit, Quarterly Journal of Economics  SSRN                                Press: National Public Radio, Washington Post, New York Times, Marginal RevolutionCenter for Equitable Growth

Last updated on 11/02/2017