The Life Cycle of Products: Evidence and Implications

We exploit detailed product- and firm-level data about the consumer goods industry to document that the sales of individual products decline at a steady pace throughout most of the product life cycle. This pattern is common across heterogeneous types of products and is mostly explained by declines in quantities sold rather than declining prices. The results are consistent with products quickly becoming obsolete as they face competition from newer products sold by competing firms and competition from newer products sold by the same firm. We build and estimate a tractable dynamic model of firm growth in which firms invest in creating new products that impact both its own existing products and the products of competitors. Our model highlights an innovation-obsolescence cycle mechanism where firms need to introduce new products to grow; otherwise their portfolios become obsolete as rivals introduce new products of their own. By introducing new products, however, firms accelerate the decline in sales of their own existing products, further depressing sales of products over their life cycle. This mechanism has sizable implications on the quantifications of sources of economic growth and the impact of innovation policies.