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Measuring the Impact of Free Goods on Real Household Consumption

Author

Listed:
  • Brynjolfsson, Erik
  • Collis, Avinash
  • Diewert, Erwin
  • Eggers, Felix
  • FOX, Kevin J.

Abstract

A puzzling development over the past 15 years is decline in Total Factor Productivity in many advanced economies. Part of this decline may be due to the rapid growth of free digital goods. Statistical agencies have no reliable way to measure the benefits of the introduction of free goods. This is true even when the provision of the goods is paid for via advertising. Yet these free goods are enormously popular and surely create substantial utility for households. In this paper, we suggest a methodology which will allow statistical agencies to form rough approximations to the benefits that flow to households from new free goods. The present paper draws heavily on the contributions of Brynjolfsson, Collis, Diewert, Eggers and Fox (2019) (subsequent references will be to BCDEF) and Diewert, Fox and Schreyer (2019). In section I, we outline how the reservation price methodology introduced by Hicks (1940; 114) can be used to measure the consumption benefits to households of new products that are provided at zero cost or costs that are close to zero. This Hicksian approach relies on normal index number theory but requires the estimation of reservation prices. In section II, we show how choice experiments about compensation for product withdrawals can be used to estimate these reservation prices. Section III concludes with a summary and implications.

Suggested Citation

  • Brynjolfsson, Erik & Collis, Avinash & Diewert, Erwin & Eggers, Felix & FOX, Kevin J., 2020. "Measuring the Impact of Free Goods on Real Household Consumption," Microeconomics.ca working papers erwin_diewert-2020-2, Vancouver School of Economics, revised 10 Jan 2020.
  • Handle: RePEc:ubc:pmicro:erwin_diewert-2020-2
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    More about this item

    Keywords

    Welfare measurement; GDP; Productivity; mismeasurement; productivity slowdown; new goods; free goods; online choice experiments; GDP-B.;

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • D60 - Microeconomics - - Welfare Economics - - - General
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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