Quality Predictability and the Welfare Benefits from New Products: Evidence from the Digitization of Recorded Music

Abstract

We explore the consequence of quality unpredictability for the welfare benefit of new products, using recent developments in recorded music as our context. We quantify the effects of new music on welfare using an explicit structural model of demand and entry with potentially unpredictable product quality. On the basis of plausible forecasting models of expected appeal, a tripling of the choice set according to expected quality adds substantially more consumer surplus as the usual long-tail benefits from a tripling of the choice set according to realized quality.