DP18184 Love-for-Variety
We study how love-for-variety, -- productivity (or utility) gains from increasing variety of differentiated inputs (or consumer goods) --, depends on the underlying demand structure. Under general symmetric homothetic demand systems, substitutability across goods and love-for-variety can be both expressed as functions of the variety of available goods, V, only. Since the homotheticity alone imposes little restrictions on the properties of these two functions, we turn to three classes of homothetic demand systems, H.S.A., HDIA, and HIIA, which are pairwise disjoint with the sole exception of CES. For each of these three classes, we establish the three main results. First, substitutability is increasing in V, if and only if Marshall’s 2nd law of demand (the price elasticity of demand for each good is increasing in its price) holds. Second, increasing (decreasing) substitutability implies diminishing (increasing) love-for-variety, but the converse is not true. Third, love-for-variety is constant, if and only if substitutability is constant, which occurs only under CES within the three classes. These classes thus offer a tractable way of capturing the intuition that gains from increasing variety is diminishing, if different goods are more substitutable when more variety is available.
