More apples vs. better apples: Distribution and innovation-driven growth

Abstract

We model distribution, the delivery of goods to customers, as an activity governed by its own technology and undertaken by firms subsequently to production. We then use the model to investigate how distribution shapes innovation-driven economic growth. We contrast two canonical specifications of distribution costs, iceberg vs. per-unit. The per-unit cost implies that factory-specific productivity improvements cannot sustain steady-state growth. Quality improvement, instead, raises the services that customers obtain from each unit of the good so that firms can increase the volume of services without increasing the volume of shipments. Unless technological advancements allow the distribution cost to fall to zero, quantity growth must cease and growth must be driven by quality improvement. More generally, the ratio of distribution to manufacturing unit costs must be constant in steady state. The iceberg cost delivers this property by assumption. The per-unit distribution cost, instead, yields an endogenous structure of the costs of serving the market.