Variety and economic development : conceptual issues and measurement problems

For any evolutionary theory of economic development, the understanding of the determinants of variety and its effects on economic systems is of central importance. On the one hand, increasing returns tend to standardize technologies thus reducing product variety. On the other hand, the resulting efficiency gains generate resources that allow for the development of new products that contribute to long-term growth. The net variety effect on economic systems remains an empirical question. We propose two variety measures, the entropy measure and Weitzman’s maximum likelihood procedure. It is argued that the two measures are complementary since entropy indicates the variety in a frequency distribution, while Weitzman’s measure is based on a distance measure. We apply both measures to data on product characteristics of aircraft (1913-1984) and helicopters (1940-1983). Aircraft variety has been increasing rapidly after the emergence of a dominant design in the thirties. The rising variety of aircraft is related to the increase of the span of performance, which is analogous to the size of the habitat of a biological species. The larger the habitat, the larger the number of niches which is expected to occur. A dominant design is established in each niche. Helicopter variety has been decreasing after a dominant design emerged as innovations hardly increased the span of performance. The presence of aircraft technology in the higher end of the helicopter market limited the commercial potential of technological improvements in helicopters