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 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. Our model features heterogeneous markups because producers of popular products care more about their existing customers while producers of less popular niche products care more about generating new customers. Surprisingly, our model matches the observed trends in household and aggregate concentration without any change in aggregate market power.

More Research From These Scholars

BFI Working Paper Oct 16, 2019

Tariff Passthrough at the Border and at the Store: Evidence from US Trade Policy

Alberto Cavallo, Gita Gopinath, Brent Neiman, Jenny Tang
Journal Article Feb 3, 2019

Regional Heterogeneity and the Refinancing Channel of Monetary Policy

Martin Beraja, Andreas Fuster, Erik Hurst, Joseph S. Vavra
BFI Working Paper May 8, 2018

International Currencies and Capital Allocation

Brent Neiman, Jesse Schreger, Matteo Maggiori
Topics:  Economic Mobility & Poverty, Financial Markets