Measuring the Impact of Free Goods on Real Household Consumption

Erik Brynjolfsson, Avinash Collis, Walter Diewert, Felix Eggers and Kevin Fox

Microeconomics.ca working papers from Vancouver School of Economics

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. (search for similar items in EconPapers)
JEL-codes: C43 D60 E23 O3 O4 (search for similar items in EconPapers)
Pages: 13 pages
Date: 2020-01-10, Revised 2020-01-10
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (9)

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Journal Article: Measuring the Impact of Free Goods on Real Household Consumption (2020)
Working Paper: Measuring the Impact of Free Goods on Real Household Consumption (2020)
Working Paper: Measuring the Impact of Free Goods on Real Household Consumption (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ubc:pmicro:erwin_diewert-2020-2

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