Working Paper: NBER ID: w22675
Authors: Luis Aguiar; Joel Waldfogel
Abstract: We explore the consequence of quality unpredictability for the welfare benefit of new products, using recent developments in recorded music as our context. Digitization has expanded consumption opportunities by giving consumers access to the “long tail” of existing products, rather than simply the popular products that a retailer might stock with limited shelf space. While this is clearly beneficial to consumers, the benefits are somewhat limited: given the substitutability among differentiated products, the incremental benefit of obscure products - even lots of them - can be small. But digitization has also reduced the cost of bringing new products to market, giving rise to a different sort of long tail, in production. If the appeal of new products is unpredictable at the time of investment, as is the case for cultural products as well as many others, then creating new products can have substantial welfare benefits. Technological change in the recorded music industry tripled the number of new products between 2000 and 2008. We quantify the effects of new music on welfare using a simple illustrative, but explicitly structural, model of demand and entry with potentially unpredictable product quality. Based on a range of plausible forecasting models of expected appeal, a tripling of the choice set according to expected quality adds substantially more to consumer surplus and overall welfare than the usual long-tail benefits from a tripling of the choice set according to realized quality, perhaps by more than an order of magnitude.
Keywords: Digitization; Welfare Benefits; New Products; Recorded Music
JEL Codes: L15; L81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| digitization (L86) | number of new products (O36) |
| number of new products (O36) | consumer surplus (D46) |
| number of new products (O36) | overall welfare (I31) |
| digitization (L86) | consumer surplus (D46) |
| digitization (L86) | overall welfare (I31) |
| unpredictability of product appeal (L15) | welfare benefits from new products (I38) |
| perfect predictability of product quality (L15) | welfare benefits from new products (I38) |