Over the last 15 years, individual households have concentrated their spending on a few preferred products. However, this is not driven by “superstar” products capturing larger market shares. Instead, households increasingly purchase different products from each other. As a result, aggregate spending concentration has decreased. We develop a model of heterogeneous household demand and use it to conclude that increasing product variety drives these divergent trends. When more products are available, households select products better matched to their tastes. This delivers welfare gains from selection equal to about half a percent per year in the categories covered by our data.
By Brent Neiman and Joseph Vavra, that is from a new issue of American Economic Journal: Macroeconomics. Some of you may recall a related discussion of “matching” in The Complacent Class.
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