Measuring the Impact of Free Goods on Real Household Consumption

AEA Papers and Proceedings, Vol.110, May 2020

13 Pages Posted: 13 Jan 2020

See all articles by Erik Brynjolfsson

Erik Brynjolfsson

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Avinash Collis

University of Texas at Austin - McCombs School of Business

Erwin Diewert

University of British Columbia (UBC)

Felix Eggers

University of Groningen

Kevin J. Fox

UNSW Australia Business School, School of Economics

Date Written: January 10, 2020

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.

Keywords: Welfare measurement, GDP, Productivity, mismeasurement, productivity slowdown, new goods, free goods, online choice experiments, GDP-B

JEL Classification: C43, D60, E23, O3, O4

Suggested Citation

Brynjolfsson, Erik and Collis, Avinash and Diewert, Erwin and Eggers, Felix and Fox, Kevin J., Measuring the Impact of Free Goods on Real Household Consumption (January 10, 2020). AEA Papers and Proceedings, Vol.110, May 2020, Available at SSRN: https://ssrn.com/abstract=3517017

Erik Brynjolfsson

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E53-313
Cambridge, MA 02142
United States
617-253-4319 (Phone)

HOME PAGE: http://digital.mit.edu/erik

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Avinash Collis (Contact Author)

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX
United States

HOME PAGE: http://www.avinash.info

Erwin Diewert

University of British Columbia (UBC) ( email )

2329 West Mall
Vancouver, British Columbia BC V6T 1Z4
Canada

Felix Eggers

University of Groningen

Kevin J. Fox

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia
(02)9385-3320 (Phone)
(02)9313-6337 (Fax)

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