Tuesday, July 03, 2007

Factoid: Americans spent only 0.2% of their money but 10% of their time on the internet

Source: Austan Goolsbee and Peter Klewnow, "Valuing Consumer Products by the Time Spent Using Them: An Application to the Internet," draft available at http://faculty.chicagogsb.edu/austan.goolsbee/research/timeuse.pdf. This result suggests that conventional consumer surplus calculations significantly understate the value of the internet.

Paper abstract:

For some goods, the main cost of buying the product is not the price but rather the time it takes to use them. Only about 0.2% of consumer spending in the U.S., for example, went for Internet access in 2004 yet time use data indicates that people spent around 10% of their entire leisure time going online. For goods like that, estimating price elasticities with expenditure data can be difficult and, therefore, estimated welfare gains highly uncertain. We show that for time-intensive goods like the Internet, a simple model in which both expenditure and time contribute to consumption can be used to estimate the consumer gains to a good using just the data on time use and the opportunity cost of people's time (i.e., the wage). The theory predicts that higher wage internet subscribers should spend less time online (for non-work reasons) and the degree to which that is true determines the elasticity of demand. Based on expenditure and time use data and our elasticity estimate, we calculate that consumer surplus from the Internet may be around 2% of full-income, or several thousand dollars. This is an order of magnitude larger than what one obtains from a back-of-the-envelope calculation using data from expenditures.

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