Recent product innovations favor the wealthy

by on May 16, 2016 at 2:53 am in Economics | Permalink

Xavier Jaravel now has a paper on this important topic:

Using detailed product-level data in the retail sector in the United States from 2004 to 2013, this paper shows that product innovations disproportionately benefited high-income households due to increasing inequality and the endogenous response of supply to market size. Annualized quality-adjusted inflation was 0.65 percentage points lower for high-income households, relative to low-income households. Using national and local changes in market size driven by demographic trends plausibly exogenous to supply factors, the paper provides causal evidence that a shock to the relative demand for goods (1) affects the direction of product innovations, and (2) leads to a decrease in the relative price of the good for which demand became relatively larger (i.e. the long-term supply curve is downward sloping). A calibration shows that this channel can explain most of the observed difference in quality-adjusted inflation rates across the income distribution.

Also see my old paper with Alex, “Who Benefits from Progress?”

1 david May 16, 2016 at 4:43 am

Your second link points to Jaravel’s paper. It should go here: http://onlinelibrary.wiley.com/doi/10.1111/j.1467-6435.1998.tb01426.x/abstract

or some other (non-paywalled?) site

2 Jeff May 16, 2016 at 10:31 am

How dare you sir!

3 rayward May 16, 2016 at 6:41 am

What about the extraordinarily high prices for mansions and yachts? These are challenging times for wealthy people. On the other hand, wealthy people get the benefit of today’s low fuel costs by flying in private jets, something the common folks don’t enjoy when they fly commercial. Why are commercial airline prices so high when fuel costs are so low? Soon enough everyone will fly in private jets because it will be cheaper than flying commercial. I suppose the supply-curve for private jets is downward sloping, but I’m already afraid of flying and I don’t need a downward sloping image in my brain.

4 Chip May 16, 2016 at 6:44 am

Leaving aside the obvious – that wealthy people will access new and initially expensive products first – isn’t the the remarkable trend that in all important metrics the gap between poor and rich is in fact narrowing.

Life expectancy, food, shelter, access to information (Internet), travel and freedom from war, enslavement, disease and violence – in all of these a non-wealthy person can live a life not unlike a millionaire.

Once basic needs are met, there is little that the very wealthy can do to increase their well being. Their gains are increasingly marginal.

5 jayarr May 16, 2016 at 12:17 pm

“A growing body of research in recent years points to the striking fact that wealthier people are living significantly longer than less wealthy people, and the gap appears to be widening.” http://blogs.wsj.com/economics/2016/04/14/the-growing-link-between-income-inequality-and-social-security-benefits/

“Digital Divide: The Technology Gap between the Rich and Poor”. http://www.digitalresponsibility.org/digital-divide-the-technology-gap-between-rich-and-poor/

6 Chip May 16, 2016 at 7:28 pm

Not because they’re wealthy, but because the personal habits that make them wealthy also help make them healthy. You don’t have to be rich to eat properly and exercise.

The technology gap for a particular product never lasts long. The decline in technology prices is occurring at the same rate that technology improves. Sure the rich will always have a lead time on a new product, but how long did it take for the poor to start flying, or own the first computers, or map their own genome.

7 Raj May 16, 2016 at 7:43 pm

Regarding life expectancy, I wonder how much this gap relates to accessability of healthcare (problematic) vs. personal choice (less so). For example, in the United States cancer / heart disease are the leading causes of death, further both are more prevalent in obese adults. BMI tends to have a negative correlation with income. Sort of like if the gap widening was by increasing smoking amongst lower income brackets (in reality low income just are quitting slower than the wealthy): If you chose to smoke (or eat tons of food and not exercise), that is your right, and you are probably enjoying life! However, if you on average die younger…. Doesn’t feel like massive change is warranted.

Also, ACCESS to the Internet is more ubiquitous and affordable (also 78% of the adult population using the Internet seems pretty decent considering 17% are senior citizens).

8 chairman May 16, 2016 at 1:00 pm

The gap between the rich and poor’s ability to live in a desirable area is growing. The gap between the rich and poor’s ability to have a secure and pleasant job is growing.

9 Urso May 17, 2016 at 1:51 pm

That second part seems to have unclear causation

10 Andrew M May 16, 2016 at 6:56 am

“The future is already here — it’s just not evenly distributed.”
— William Gibson

At 72 pages long, I’m not going to read the whole paper. Does it only look at product innovations? In that case it’s missing big innovations such as fracking, which benefits the masses by lowering the cost of oil.

11 zbicyclist May 16, 2016 at 7:26 am

The data used is the Nielsen Homescan panel, so they are looking only at frequently purchased consumer packaged goods sold in groceries and related outlets (drug,dollar …).

“Product innovation [is] defined as the introduction of new barcodes.”

So, the universe of innovation is small. No fracking (per Andrew M’s comment). No tech advances like smartphones, the internet, or free podcasts. No prescription drugs. No Marginal Revolution University. No distribution innovations (e.g. Walmart superstores making a larger amount of low priced merchandise available, or Amazon). In fact, consumer packaged goods could be characterized as one of the least innovative areas in the economy over recent decades in terms of actual citizen benefit from the innovations.

And defining innovation as the introduction of new barcodes means we are largely looking at mostly meaningless innovations. New flavors, new sizes, new packaging. For example, as yogurt moved from 8 oz packages to 6 oz packages a few years ago, all the barcodes had to change. This is not really what we think of as startling innovation.

12 derek May 16, 2016 at 9:27 am

All the data we need without leaving the office!

13 Chris Hansen May 16, 2016 at 10:10 am

I work for a software company. We have a ton of part numbers on dozen of price lists. We allegedly innovate all the time. No bar codes.

14 mulp May 16, 2016 at 1:25 pm

“In that case it’s missing big innovations such as fracking, which benefits the masses by lowering the cost of oil.”

The economy was doing better when gasoline was at $4 a gallon, not since it’s fallen to $2.

The benefit of fracking was the jobs created by common labor in building all the capital assets required to benefit from fracking, the added higher complexity drill rigs, the larger number of trucks required, the larger number of earth movers, the larger number of people laying pipe and building pumping stations, the larger numbers of people building storage tanks in Cushing, the larger number of people building train tank cars and upgrading train tracks, the larger number of truck drivers, the larger number of food workers paid $15-20 flipping burgers and cleaning man camps, the shift in road workers from regions slashing road budgets to cut taxes to regions where fracking forces road projects,…

The $4 gasoline and heating oil led to massive wealth redistribution at $10 a week per person from the pockets of US workers to the oil industry.

Fracking redistributed that wealth back to US workers and away from the pockets of Saudis who pay kids not to work and to go to mosques with imams bought by oil who preach hatred.

Reducing the wealth redistribution over the past year has hurt US workers just as increasing oil imports from 1985 to 2008 killed US jobs and hurt US workers.

Sorry, I grew up in the 50s and 60s when economics did not see labor costs as a very very very bad thing to be eliminated by any means, especially by imports from cheap labor nations. I grew up when wages were a glorious free market capitalism way to redistribute wealth widely, away from the rent seekers and monopolists and slave masters.

I find it interesting to see conservatives so desperate to increase consumer spending to boost gdp they are calling for bigger and bigger tax cuts for the working poor who pay no taxes so the working poor can put their tax cuts into the pockets of the monopolists and rent seekers.

15 The Original D May 16, 2016 at 3:26 pm

Sorry, I grew up in the 50s and 60s

I’m sure keeping blacks and women in a very narrowly defined range of jobs had no impact on that utopia.

16 8 May 16, 2016 at 7:56 am

Mass immigration, legal and illegal.

17 Axa May 16, 2016 at 8:44 am

2004-2013, that’s 9 years. After looking at the adoption data of other technologies, it seems it’s good to look at longer time periods. For refrigerators, it took 30 years from 10% to 90% of households. Color TVs: 20 years. It seems computers will never reach 90% due to competition of tablets and phones. http://www.theatlantic.com/technology/archive/2012/07/most-people-didnt-have-a-c-until-1973-and-other-strange-tech-timelines/260427/

So, is it “inequality” or just a lag? Perhaps lower income people will buy the products later, as before.

18 Slocum May 16, 2016 at 10:19 am

Well, yes. And by the time the products are affordable for lower-income people, the R&D will have been amortized and most of the production costs will have been rung out. The lower-income late adopters get much better deals and thereby definitely DO enjoy the initial deflation by buying the products only after it has run its course.

19 zbicyclist May 16, 2016 at 3:19 pm

Slocum, that’s another way in which looking at consumer packaged goods is atypical, Products are typically introduced with higher promotional offers than will be available later in the life cycle, in order to stimulate trial . In other words, they will usually be cheaper in their first year than they ever will be again.

I don’t have a problem with the study per se; I just have a problem with overgeneralizing from this particular data set to innovation in general.

20 EB May 16, 2016 at 8:50 am

Tyler, who benefits from not being able to access a copy of your Kyklos paper free (yes, its marginal cost is zero)? That is the question. As long as people cannot access new products at prices equal to their marginal costs, there is room to increase the number of beneficiaries. Sometimes it may take many years for it to happen, but that it’s not the case of your old papers. If access to your old papers were free (because their marginal cost is zero), social benefit would be maximized (I’m not saying that the increase would be significant).

21 Ray Lopez May 16, 2016 at 9:05 am

Nothing novel here. How is this different from the old adage that in any new product, there are “early adopters…middle adopters, then, when stuff cheapest, late adopters”?

The stuff about inflation being less for the rich doesn’t ring true at all (private school tuition always exceeds public school tuition increases).

Finally, this is flawed: “Third, the dataset offers a good measure of product innovations, defined as the introduction of new barcodes. … In other words, it is safe to assume that if the bar code changes, it is likely that some noticeable characteristic
of the product has changed.” – not true, notwithstanding the paper cited. It’s well known the only reason new bar codes are offered is for the same good to be offered at a higher price, for product price differentiation purposes (e.g., Cadillac parts higher than Chevy parts, though they do the same thing).

Sorry but I smell the garbage of junk science here.

22 mulp May 16, 2016 at 1:44 pm

It shows innovation by some economists who get cheap low quality data by not paying much in labor costs. Sorta like economics before 1930 when the surplus of cheap labor made justifying government paying cheap workers to collect economic data and make work data analyzers like Milton Friedman critiqued that data quality leading to more workers paid to collect more data.

Before 1930 there was census every decade and import-export records for tariffs and other internal tariffs, and some other random data collection related to government spending, like the tally of paved and unpaved roads to justify budgets for paying roads.

From 1930 to 1945 thousands of workers were hired to collect data and post war, they were reorganized and institutionalized in the BLS and Census, with others institutionalized in Commerce and IRS. Doubling the number of workers collecting data for economists to analyze would redistribute maybe $5 a year per person to the pockets of data collectors reducing welfare payments, and providing better data.

Or increasing government research grant funding would increase the number of RAs getting tax dollars put in their pockets to pour over lots of raw data to build databases for their thesis advisors to use writing better papers.

23 derek May 16, 2016 at 9:29 am
24 Slocum May 16, 2016 at 9:47 am

Well this seems a perverse framing of the bleeding edge. If I understand it correctly, the story is this. The rich are the first to spend on new, extremely expensive products (flat-screen TVs, smart phones, premium beef jerky). Eventually those products drop from the stratosphere, but for some time period the prices remain high enough to still be luxury goods, so only the rich enjoy this deflation. Then the products become cheap enough for the masses to afford. Great news, right? The rich subsidized the R&D, and now after a few years everybody else gets to enjoy the results. But no, wait — it’s a bad thing. Why? Because by the time the products become so cheap everybody can afford them, the main enabling innovations are all already in place, the market is fully competitive, economies of scale have been realized, etc so although the masses now get the benefit of being able to afford the former luxury goods, the period of rapid deflation in the category is over. So they get to enjoy the new goods but not the initial bleeding edge deflation (but also never suffered paying the silly bleeding edge prices — say $5000 for a big, boxy DLP projection TV that was obsolete almost as soon as it was out of the box).

25 anon May 16, 2016 at 10:03 am

This is correct, the rich and foolish (gaming PC builders, Apple customers) push the market, and the poor or prudent benefit.

I just picked up a new (original model) Chromebook Pixel for my mom. $399. Thank you early adopters.

(She likes her old HP Chromebook so much she has worn the letters off the keys.)

26 anon May 16, 2016 at 9:56 am

I think if you wanted to capture how my life has changed, or how kids today have it different, you would have to do a time use study. The stuff in cupboards matters much less than what you are doing.

Reminds me of a line about overworked Microsofies, that they defined themselves by the sports gear in the garage, that they never got to use.

What you actually do defines your condition.

27 Urso May 16, 2016 at 12:47 pm

The more expensive a kitchen is, the less it is used.

28 anon May 16, 2016 at 12:52 pm

Right. Add that a sub-zero actually cools to 40 and just breaks more than a plain, white, Kenmore.

29 Slocum May 16, 2016 at 4:14 pm

And the buyers know that. The best defense I’ve heard is something like, “Yes, I know I don’t need my commercial Viking range. But to me, it’s a beautiful example of industrial design, I can afford it, and I enjoy it. So why is it sillier to spend $5000 on the range (which is also functional) than, say, a work of art?”

30 Nathan Taylor May 16, 2016 at 10:23 am

Tyler Cowen – In your post, the link to your “Who Benefits from Progress?” goes to the wrong place (it goes to Xavier Jaravel’s paper). You may want to update it to the correct one (which i found interesting)

https://ideas.repec.org/a/bla/kyklos/v51y1998i3p379-97.html

31 The Engineer May 16, 2016 at 11:16 am

This is a strange study, seeing as how the world seems to revolve around smartphones these days.

The interesting thing about smartphones is that they didn’t exist 10 years ago, and now they’re literally everywhere, in particular the hands of the poor. And they use the same phone as the rich do.

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