Three Essays on Consumption & Geography

Abstract

This document contains the first two chapters from my dissertation, titled Three Essays on Consumption and Geography, which use data provided by the Kilts Center for Marketing Data Center. Together they highlight the importance of accounting for geographic differences in new product entry to accurately measure real consumption using household-level spending data and a model to construct cost-of-living-adjusted price indices. The first chapter estimates real consumption's growth rate and volatility in light of three new facts documenting geographic differences in consumption: (1) consumers in separate markets buy different products, (2) a product's market share varies geographically conditional on relative price, and (3) product variety growth and its cyclicality varies geographically. These facts suggest that existing methods to account for product variety changes overstate the benefits to consumers by overlooking geographic diversity in consumption baskets. Quantitatively, focusing on aggregate product variety changes overstates real consumption growth by 2.75 percentage points primarily by assuming that local product entry benefits all consumers nationally. Nonetheless, accounting for product variety changes is important. Our real consumption series grows 3 percentage points faster than a statistical agency benchmark and has twice the volatility due to product variety’s procyclicality. The second chapter examines how accounting for local product variety changes alters aggregate welfare estimates and our understanding of regional heterogeneity. Concentrating on in-home product spending from 2004-2014, aggregate quarterly consumption-equivalent welfare was 16.20 percent higher than a statistical agency benchmark indicates. However, focusing on aggregate statistics masks large geographic differences that statistical agency methods understate, implying greater real consumption growth inequality across regions than previously believed.