The Unequal Gains from Product Innovations: Evidence from the US Retail Sector
This paper shows that product innovations disproportionately benefit high income households due to increasing inequality and the endogenous response of supply to market size. Using detailed product level data in the retail sector in the United States, the paper shows that from 2004 to 2013 annualized quality adjusted inflation has been 0.65 percentage points lower for high income households, relative to low income households. Using national and local changes in market size driven by demographic trends plausibly exogenous to supply factors, the paper then provides causal evidence that a shock to the relative demand for goods (1) affects the direction of product innovations, and (2) leads to a decrease in the relative price of the good for which demand became relatively larger (i.e. the long term supply curve is downward sloping) A calibration shows that this effect is sufficiently strong to explain most of the observed difference in quality adjusted inflation rates across the income distribution.