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Income Differences and Prices of Tradables: Insights from an Online Retailer

  • Ina Simonovska

I study the positive relationship between prices of tradable goods and per-capita income. I develop a highly tractable general equilibrium model of international trade with heterogeneous firms and non-homothetic consumer preferences that positively links prices of tradables to consumer income. Guided by the model’s testable prediction, I estimate the elasticity of price with respect to per-capita income from a unique dataset that I construct, which features prices of 245 identical goods sold in 29 European, Asian, and North American markets via the Internet by Spain’s second largest apparel manufacture—Mango. I find that doubling a destination’s per-capita income results in an 18% increase in the price of identical items sold there. Per-capita income differences account for a third, while shipping cost differences can explain up to a third of the cross-country price variations of identical items purchased via the Internet by consumers who do not take advantage of quantity discounts. The price elasticity estimates compare favorably to estimates that I obtain from a standard dataset that features prices across retail locations around the world, suggesting that variable mark-ups play a key role in accounting for observed cross-country differences in prices of tradables.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16233.

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Date of creation: Jul 2010
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Publication status: published as Ina Simonovska, 2015. "Income Differences and Prices of Tradables: Insights from an Online Retailer," The Review of Economic Studies, vol 82(4), pages 1612-1656.
Handle: RePEc:nbr:nberwo:16233
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