Hidden Value: How Consumer Learning Boosts Output BY LEONARD NAKAMURA phones. Ipads. Wikipedia. Google Maps. Yelp. TripAdvisor. product exists and then what its char- New digital devices, applications, and services offer advice acteristics and performance are like. and information at every turn. The technology around This information acquisition in turn I us changes fast, so we are continually learning how best lowers the risk associated with any to use it. This increased pace of learning enhances the given purchase and, on average, will satisfaction we gain from what we buy and increases its value to us over raise the amount of pleasure or use we time, even though it may cost the same — or less. However, this effect get from it. of consumer learning on value makes inflation and output growth more Consider all the information avail- difficult to measure. As a result, current statistics may be undervaluing able to help us decide to see a movie. household purchasing power as well as how much our economy We can look at trailers in the theater or online; we can read reviews and produces, leading us to believe that our living standards are declining compare the number of stars the movie when they are not. gets from critics or fellow moviegoers; and we can ask our friends. Similarly, when deciding on a restaurant, we can This disconnect has implications Then we will turn to theories of con- consult online sources like Yelp, Zagat, for policy. Economists are more famil- sumer preferences and behavior that or Chowhound; we can examine the iar with how learning makes us better take learning into account. They may menu and prices; we can read a review workers by increasing our productiv- point us toward more accurate ways to in the local paper; and we can listen ity, typically reflected economywide estimate inflation and output growth to our friends’ suggestions. All this in higher inflation-adjusted wages than measuring prices directly. information-gathering raises the prob- and output per capita. However, how ability that we will enjoy the movie or learning makes us better consumers MORE BENEFIT PER restaurant more than if we had chosen is less likely to be captured by official DOLLAR SPENT blindly. When we take the time to measures of consumption and out- In this era of rapid innovation find out more information, we are able put. To the extent that these statistics and creativity, consuming so many to select products most suited to our might be imprecise, economists are new products typically involves learn- tastes and will generally experience liable to be led astray in assessing the ing both before and after we purchase higher satisfaction per dollar spent, economy’s successes and failures, and them for the first time. Acquiring in- given a fixed menu of choices, than we policymakers may be misled in decid- formation about a product we haven’t otherwise would. Raising our satisfac- ing which actions to adopt. bought before is so automatic that we tion per dollar may also make us more But how can one measure the im- may hardly notice it as an economic willing to buy more products within pact of consumer learning on the well- phenomenon. Indeed, if the product that category. being of households? First, we need to is novel, we must acquire at least some A second layer of benefits occurs explore just how learning affects value. information: First we find out that the through use: Using the features on my e-mail or word processing program becomes second nature as, one by one, I try out new tasks. This form of Leonard Nakamura is a vice president and economist at the Federal learning-by-doing raises the product’s Reserve Bank of Philadelphia. The views expressed in this article are not necessarily those of the Federal Reserve. This article and value in later uses; once I know that other Philadelphia Fed reports and research are available at www. a feature exists and how to use it, I philadelphiafed.org/research-and-data/publications. can more quickly find it and use it. As I learn to use my smartphone by www.philadelphiafed.org Business Review Q3 2014 9 making a call or finding a destina- mation allows the smart consumer to has gone up, then this is not the right tion or taking a picture or watching a choose movies, TV shows, restaurants, measure of our inflation rate, since the video clip, using it becomes faster and and a myriad of consumer products quality of the service has risen and we more successful.1 Moreover, with cheap and services that are more to our lik- get more for the price. memory and computing power, we can ing. The cost of the better information Similarly, our cable TV bills (as customize the devices and applications that helps us make these better choices measured in the U.S. CPI index of “ca- to our needs. Using an application can has fallen, allowing us to derive greater ble and satellite TV and radio”) have also result in a valuable history to tap satisfaction from what we buy. Thus, risen at an average annual rate of just later: The letters I have written and our knowledge of the Internet enhanc- over 2 percent over the past five years. the PowerPoint slides I have produced es the value of — and spurs the devel- Does this rate fully reflect the greater in the past may have pieces that I can opment of — new ways to reach it. value we derive from cable service? insert into new e-mails and presenta- Yet, so much of the content on the When we first use cable TV, we may tions. In many cases, the application has the ability to learn our habits and guide us to better choices, sometimes Does this improvement in our welfare show up using the preferences of other users in measures of real consumption and growth? who make choices similar to ours. For example, Netflix looks at our past Typically not. movie choices to suggest new ones. What is economically significant Internet — videos, TV shows, music, know only a few channels. Over time, about this form of learning is that and social media — is available at no as we channel-surf and learn more the product is the same, but we value extra cost. So, as we learn about the about the content shown on different it more. Yet, standard measures of Internet, we use our connection to channels, we may become attached to economic output miss this increase it more intensively, but we don’t pay three or four channels we didn’t know in value because the product appears more. The Internet connection itself about before. As a result, access to unchanged. As a result, statistics is unchanged; what is changed is the cable TV becomes more valuable to us. measuring overall consumption may content and interactions it gives us But how can we measure that value? be too low.2 access to. Because if the satisfaction For example, let’s consider how we we gain from the Internet connec- MEASURING THE VALUE value an Internet connection. Entre- tion is greater, we would be willing to OF INFORMATION preneurs keep developing search en- pay more for it. But if the market for Consider a traveler planning to gines, aggregators, instructional sites, Internet connections is competitive, go to a foreign city for the first time. and various applications that make we don’t have to: Competition prevents Initially, the traveler sees that hotels A our use of the Internet more efficient. providers from charging more as Inter- and B are equally priced and have sim- Plus, smartphones and tablets make it net offerings expand, so we get more ilar luxury levels as measured by that easier to connect whenever we want value for the same amount of money. country’s rating scheme. But the In- and wherever we are. All of this infor- But does this improvement in our ternet allows the traveler to see reviews welfare show up in measures of real from other travelers, detailed maps of consumption and growth? Typically the hotels’ locations, and lists of the not. The monthly fee we pay to the In- hotels’ amenities. Let’s say that the 1 Although this article does not explore the notion, it must be admitted that there is a ternet service provider this year is buy- more knowledgeable concierge at hotel countervailing truth: Our existing knowledge ing more for us than the monthly fee B is worth $10 a day to the traveler. may become outmoded at a faster rate as new technologies race at us. This depreciation of we paid five years ago. If the fee has Learning about the concierge over the our knowledge is a cost of rapid technological gone up, we measure this as pure infla- Internet makes the traveler better off progress but is also something we have difficulty tion: The price of “Internet services by $5: In the absence of this informa- measuring. and electronic information providers” tion, the traveler would have chosen 2 Another interesting implication of consumer in the U.S. Bureau of Labor Statistics’ randomly between the two hotels and learning is that it may be one reason that so- called early adopters are willing to pay a higher consumer price index (U.S. CPI) has would have gotten the good concierge initial price for the latest technology. Even gone up at an annual rate of 1 percent. half the time, for an expected value of though they realize the price will drop later, they know they will become better off as they But if the satisfaction we have gained $5.