Technological Progress on Consumption Side: Consolidation and Prevalence of Complements

Abstract

This paper discusses the effect of technological innovation on consumption side. Apart from Quality effect (improvement in the quality of service or reduction in constant-quality price), there is another Consolidation effect. This takes form of more features (which can be enjoyed together) being included in the same service. This effect is driven by the Time-constraint in form of technological limit on consumption per unit of time. The effect is stronger if features being bundled together are complementary to each other. Another aspect is shown by offering an alternative explanation of Engel's Law. If complementarity of a sector is affected by technological externalities, the income share spent on that sector changes. The direction of movement depends whether the tech progress has developed enhancing (positive) or impeding (negative) complements. Service sector has more of these enhancing complements and hence income share spent on service sector has gone up.

JEL Classification: D62, O33, O31, L80