Empirical Economics | 2019

Valuing the quantity and quality of product variety to consumers

 

Abstract


This paper presents a new decomposition of the cost of living into price, variety-quality and variety-quantity components. Variety-quantity reflects the value to consumers of an increase in the number of products, while variety-quality measures the average attractiveness of new versus disappearing products. The decomposition is relevant to calculation of the CPI and understanding firms’ product development practices. Our empirical results, using a large US scanner data set, show that variety-quality change is the most important component of variety improvement. This reduced the cost of living by 1.34 percentage points per annum on average, while variety-quantity lowered it by 0.67 percentage points.

Volume 57
Pages 2107-2128
DOI 10.1007/S00181-018-1532-6
Language English
Journal Empirical Economics

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