The Acceleration in Variety Growth

Abstract

The expansion of variety in consumer and intermediate goods plays a central role in many theoretical models of growth. Examples include Paul M. Romer (1990), Gene M. Grossman and Elhanan Helpman (1991 Ch. 3), and Robert J. Barro and Xavier Sala-i-Martin (1995 Ch. 6). In contrast, evidence on variety growth is very sparse. Jerry A. Hausman (1997) and Amil Petrin (1999) estimate the consumer gains to the introduction of specific brands of specific products (Apple-Cinnamon Cheerios and minivans, respectively). Similarly, Manuel Trajtenberg (1989) and Hausman (1999) estimate the gains from computed tomography (CT) scanners and cellular phones, respectively. However, quantifying the aggregate importance of new products on a good-by-good basis is probably not feasible. In particular, it is not possible to obtain data to estimate consumer surplus from the myriad of new models and features that are continually introduced. Reflecting these problems, the Boskin Commission (1996) offers only a few, often speculative, calculations in addressing the issue of variety gains. We take an indirect approach. We exploit how new varieties alter spending patterns, drawing expenditures away from comparatively dormant categories. Table 1 illustrates for a few cases of dramatic product innovations. As the table shows, rapid growth in spending on cable television since 1980 has fueled a broad increase in spending on television, despite a relative decline in spending on television sets. Similarly, VCR’s and movie rentals have spurred an increase in overall spending on movies at home and theaters, personal computers have brought about increased spending on home audio and video equipment, and cell phone services have been responsible for the increased spending on all telephone services. In the 20 years prior to the ascendance of these major new items, all of their categories were stagnant or in relative decline. More generally, we find that consumers have been rapidly shifting away from “static” categories (i.e., those in which there has been little variety or quality gain). This shift far exceeds what can be explained by the impact of relative Engel curves or relative price changes. Our results suggest that variety has increased by perhaps 1 percent per year over the past 40 years. More striking is that most of this growth occurs in just the past 20 years—explaining our title. Looking across 106 more detailed categories, we relate share changes to U.S. Bureau of Labor Statistics (BLS) item-substitution rates. Itemsubstitution rates measure how often the BLS replaces an item in the pricing basket with another model because the former has disappeared from a sample outlet. Frequent BLS item substitutions predict increased spending on a category, even after controlling for Engel-curve, price, and demographic effects. This suggests that new varieties do increase spending on a category, as well as drive out or replace incumbent varieties. Compared to Engel curves, we find that item-substitution rates are a more reliable predictor of shifts in spending shares across goods. Related to this, we question Bruce W. Hamilton (1998) and Dora Costa’s (2000) reliance on food’s share and food’s Engel curve to measure the true rate of U.S. economic growth.