The Rise of Niche Consumption
59 Pages Posted: 10 Mar 2018 Last revised: 16 Jun 2019
Date Written: June 14, 2019
We show that over the last 15 years, the typical household has increasingly concentrated its spending on a few preferred products. However, this is not driven by ``superstar'' products capturing larger market shares. Instead, households increasingly differ in terms of which products they focus their spending on. As a result, aggregate spending concentration has in fact decreased over this same period. We use a novel heterogeneous agent model to conclude that increasing product variety is a key force underlying these divergent trends. When more products are available, households can select a subset better matched to their particular tastes. This results in substantial welfare gains that are not reflected in standard government statistics. The model features heterogeneous markups because producers of popular products care more about maximizing profits from existing customers while producers of less popular niche products care more about expanding their set of customers. Surprisingly, however, our model can match the observed trends in household and aggregate concentration without any resulting change in aggregate market power.
Keywords: Product Concentration, Niche Products, Market Power, Markups, Polarization, Long-tail
JEL Classification: E21, E31, D12, D4
Suggested Citation: Suggested Citation