Income inequality, neighbourhood effects and product quality
In this paper we analyze the effect of income inequality on market outcome and hence the welfare of the consumer in the industry which is both horizontally and vertically differentiated. The idea is that any income distribution over the spatial horizon is reflected in the demand structure and this shapes the market outcome. We consider a setting where the rich and poor live side by side on a linear city and two duopolist firms are positioned at the two ends of the city. We find that for a homogenous distribution of income or when the poor's income or density is too low, both firms offer the same quality. For a homogenous income distribution firm does not perceive much benefit from product differentiation. Given this, for a very high difference in the fixed costs, both firms offer the low quality. But when the difference in the fixed costs is low, both firms offer the high quality. For a more heterogeneous income distribution and an intermediate range of the difference in fixed costs, one firm offers the high quality and the other the low quality. Product differentiation on one hand allows firm to alleviate price competition and, on the other hand, serves consumers' demand better. We show that although in general a rise in income inequality has a spiraling negative effect on the welfare of the poor, there are situations, particularly when the poor income is very low, when an increase in the rich income could be welfare improving for the poor.
|Date of creation:||Aug 2010|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.isid.ac.in/~pu/
More information through EDIRC
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.:
- Olivier Coibion & Liran Einav & Juan Carlos Hallak, 2006.
"Equilibrium Demand Elasticities across Quality Segments,"
550, Research Seminar in International Economics, University of Michigan.
- Coibion, Olivier & Einav, Liran & Hallak, Juan Carlos, 2007. "Equilibrium demand elasticities across quality segments," International Journal of Industrial Organization, Elsevier, vol. 25(1), pages 13-30, February.
- Neven, D. & Thisse, J-F., 1989. "On Quality And Variety Competition," CORE Discussion Papers 1989020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Jyotsna Jalan & E.Somanathan, 2004. "Being informed matters: Experimental evidence on the demand for environmental quality," Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers 04-08, Indian Statistical Institute, New Delhi, India.
- Tarasov, Alexander, 2009.
"Income distribution, market structure, and individual welfare,"
Munich Reprints in Economics
19578, University of Munich, Department of Economics.
- Tarasov Alexander, 2009. "Income Distribution, Market Structure, and Individual Welfare," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-39, December.
- Tarasov, Alexander, 2007. "Income Distribution, Market Structure, and Individual Welfare," MPRA Paper 7682, University Library of Munich, Germany, revised Jan 2008.
- Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June.
- Pablo Fajgelbaum & Gene M. Grossman & Elhanan Helpman, 2011.
"Income Distribution, Product Quality, and International Trade,"
Journal of Political Economy,
University of Chicago Press, vol. 119(4), pages 721 - 765.
- Fajgelbaum, Pablo & Grossman, Gene M. & Helpman, Elhanan, 2011. "Income distribution, product quality, and international trade," Policy Research Working Paper Series 5843, The World Bank.
- Pablo D. Fajgelbaum & Gene M. Grossman & Elhanan Helpman, 2009. "Income Distribution, Product Quality, and International Trade," NBER Working Papers 15329, National Bureau of Economic Research, Inc.
- Yurko, Anna, 2006.
"How Does Income Inequality Affect Market Outcomes in Vertically Differentiated Markets?,"
4028, University Library of Munich, Germany, revised Jul 2007.
- Yurko, Anna V., 2011. "How does income inequality affect market outcomes in vertically differentiated markets?," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 493-503, July.
- Corrado Benassi & Alessandra Chirco & Caterina Colombo, 2006. "Vertical Differentiation And The Distribution Of Income," Bulletin of Economic Research, Wiley Blackwell, vol. 58(4), pages 345-367, October.
- Degryse, Hans, 1996.
"On the Interaction between Vertical and Horizontal Product Differentiation: An Application to Banking,"
Journal of Industrial Economics,
Wiley Blackwell, vol. 44(2), pages 169-86, June.
- Degryse, H.A., 1996. "On the interaction between vertical and horizontal product differentiation : An application to banking," Other publications TiSEM 384e9355-ea79-4b3e-90cb-1, Tilburg University, School of Economics and Management.
- Wauthy, X., 1994.
"Quality Choice in Models of Vertical Differentiation,"
Discussion Papers (IRES - Institut de Recherches Economiques et Sociales)
1994033, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
- Wauthy, Xavier, 1996. "Quality Choice in Models of Vertical Differentiation," Journal of Industrial Economics, Wiley Blackwell, vol. 44(3), pages 345-53, September.
- Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, March.
When requesting a correction, please mention this item's handle: RePEc:ind:isipdp:10-06. 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: (Shamprasad M. Pujar)
If references are entirely missing, you can add them using this form.