The Effect Of Income Inequality On Price Dispersion
Using a supply/demand consumer model with search, we show under what conditions the distribution of income within a community is related to the type of firms that exist within that community, impacting the level of prices. We assume that searching for the lowest price costs both time and money to the consumer. If time and money costs are high enough low-income consumers cannot afford the monetary cost of search, while wealthy consumer are not willing to take the time to look for the lowest price. The middle class have the right balance of time and money cost of search and therefore are the most aggressive shoppers. We use a supply side model of firm output and pricing strategy to demonstrate that firms located in more informed communities are more likely to enter the market as large low-priced retailers. By connecting these two results, we show under what conditions the size of the middle class can have a negative relationship with the level of prices in a local market. Our paper goes beyond other work on causes of price dispersion by allowing consumers to purchase a continuous amount of the good, and by incorporating a distribution of search costs. Both these modifications allow us to focus more specifically on the link between income distribution and prices.
|Date of creation:|
|Date of revision:|
|Contact details of provider:|| Postal: 199 Aba Khoushy Ave., Mount Carmel, Haifa, Israel, 3498838|
Web page: http://hevra.haifa.ac.il/econ/index.php/en/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Rhodes, Andrew, 2011. "Multiproduct pricing and the Diamond Paradox," MPRA Paper 32511, University Library of Munich, Germany.
- Frankel, David M. & Gould, Eric, 2001.
"The Retail Price of Inequality,"
Staff General Research Papers
11922, Iowa State University, Department of Economics.
- David M. Frankel, 2000. "The Retail Price of Inequality," Econometric Society World Congress 2000 Contributed Papers 0577, Econometric Society.
- Frankel, D.M., 1996. "The (Retail) Price of Inequality," Papers 23-96, Tel Aviv.
- Steven Salop & Joseph Stiglitz, 1977. "Bargains and ripoffs: a model of monopolistically competitive price dispersion," Special Studies Papers 94, Board of Governors of the Federal Reserve System (U.S.).
- Michael T Rauh, 1997.
"A Model of Temporary Search Market Equilibrium,"
Economics Working Paper Archive
392, The Johns Hopkins University,Department of Economics.
- Neil Wrigley, 2002. "'Food Deserts' in British Cities: Policy Context and Research Priorities," Urban Studies, Urban Studies Journal Limited, vol. 39(11), pages 2029-2040, October.
- Steven Salop & Joseph Stiglitz, 1977. "Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 493-510.
- Alcaly, Roger E & Klevorick, Alvin K, 1971. "Food Prices in Relation to Income Levels in New York City," The Journal of Business, University of Chicago Press, vol. 44(4), pages 380-97, October.
- Avishay Braverman, 1980. "Consumer Search and Alternative Market Equilibria," Review of Economic Studies, Oxford University Press, vol. 47(3), pages 487-502.
- Muller, Christophe, 2002. "Prices and living standards: evidence for Rwanda," Journal of Development Economics, Elsevier, vol. 68(1), pages 187-203, June.
- MacDonald, James M. & Nelson, Paul Jr., 1991. "Do the poor still pay more? Food price variations in large metropolitan areas," Journal of Urban Economics, Elsevier, vol. 30(3), pages 344-359, November.
- Kunreuther, Howard, 1973. "Why the Poor May Pay More for Food: Theoretical and Empirical Evidence," The Journal of Business, University of Chicago Press, vol. 46(3), pages 368-83, July.
- Michael R. Baye & John Morgan & Patrick Scholten, 2006. "Information, Search, and Price Dispersion," Working Papers 2006-11, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
- Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
- Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
- Rafael Rob, 1985. "Equilibrium Price Distributions," Review of Economic Studies, Oxford University Press, vol. 52(3), pages 487-504.
When requesting a correction, please mention this item's handle: RePEc:haf:huedwp:wp201202. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anna Rubinchik)
If references are entirely missing, you can add them using this form.