Quality Predictability and the Welfare Benefits from New Products: Evidence from the Digitization of Recorded Music

58 Pages Posted: 26 Sep 2016  

Luis Aguiar

European Commission - Joint Research Center - Digital Economy Unit

Joel Waldfogel

University of Minnesota - Twin Cities - Carlson School of Management; National Bureau of Economic Research (NBER); University of Minnesota - Twin Cities - Department of Economics

Date Written: September 2016

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.

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Suggested Citation

Aguiar, Luis and Waldfogel, Joel, Quality Predictability and the Welfare Benefits from New Products: Evidence from the Digitization of Recorded Music (September 2016). NBER Working Paper No. w22675. Available at SSRN: https://ssrn.com/abstract=2843388

Luis Aguiar (Contact Author)

European Commission - Joint Research Center - Digital Economy Unit ( email )

Edificio Expo - C/ Inca Garcilaso 3
Sevilla, 41092
Spain

HOME PAGE: http://www.luis-aguiar.com

Joel Waldfogel

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
Minneapolis, MN 55455
United States

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