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Valuing Consumer Products by the Time Spent Using Them: An Application to the Internet

  • Austan Goolsbee
  • Peter J. Klenow

For some goods, the main cost of buying the product is not the price but rather the time it takes to use them. Only about 0.2% of consumer spending in the U.S., for example, went for Internet access in 2004 yet time use data indicates that people spend around 10% of their entire leisure time going online. For such goods, estimating price elasticities with expenditure data can be difficult, and, therefore, estimated welfare gains highly uncertain. We show that for time-intensive goods like the Internet, a simple model in which both expenditure and time contribute to consumption can be used to estimate the consumer gains from a good using just the data on time use and the opportunity cost of people's time (i.e., the wage). The theory predicts that higher wage internet subscribers should spend less time online (for non-work reasons) and the degree to which that is true identifies the elasticity of demand. Based on expenditure and time use data and our elasticity estimate, we calculate that consumer surplus from the Internet may be around 2% of full-income, or several thousand dollars per user. This is an order of magnitude larger than what one obtains from a back-of-the-envelope calculation using data from expenditures.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 96 (2006)
Issue (Month): 2 (May)
Pages: 108-113

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Handle: RePEc:aea:aecrev:v:96:y:2006:i:2:p:108-113
Note: DOI: 10.1257/000282806777212521
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  1. Aviv Nevo, 2001. "New Products, Quality Changes and Welfare Measures Computed From Estimated Demand Systems," NBER Working Papers 8425, National Bureau of Economic Research, Inc.
  2. Mark Aguiar & Erik Hurst, 2005. "Consumption versus Expenditure," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 919-948, October.
  3. Downes, Tom & Greenstein, Shane, 2002. "Universal access and local internet markets in the US," Research Policy, Elsevier, vol. 31(7), pages 1035-1052, September.
  4. Jerry Hausman, 1997. "Cellular Telephone, New Products and the CPI," NBER Working Papers 5982, National Bureau of Economic Research, Inc.
  5. Amil Petrin, 2002. "Quantifying the Benefits of New Products: The Case of the Minivan," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 705-729, August.
  6. Timothy F. Bresnahan & Robert J. Gordon, 1996. "The Economics of New Goods," NBER Books, National Bureau of Economic Research, Inc, number bres96-1, December.
  7. Austan Goolsbee & Amil Petrin, 2004. "The Consumer Gains from Direct Broadcast Satellites and the Competition with Cable TV," Econometrica, Econometric Society, vol. 72(2), pages 351-381, 03.
  8. Austan Goolsbee & Peter J. Klenow, 1999. "Evidence on Learning and Network Externalities in the Diffusion of Home Computers," NBER Working Papers 7329, National Bureau of Economic Research, Inc.
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