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Nonlinear Pricing in Village Economies

Author

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  • Orazio Attanasio
  • Elena Pastorino

Abstract

This paper analyzes and estimates the impact of quantity discounts for basic staples in rural Mexico. We propose a model of price discrimination that nests those of Maskin and Riley (1984) and Jullien (2000), in which consumers differ in their tastes and, due to subsistence constraints, in their ability to pay for a good. We show that, under mild conditions, a model in which consumers face heterogeneous subsistence or budget constraints is equivalent to one in which consumers have access to heterogeneous outside options. We then rely on known results (Jullien (2000)) to characterize the equilibrium price schedule. We analyze the effects of nonlinear pricing on market participation, as well as the impact of a market-wide income transfer on the price schedule, when consumers are differentially budget constrained. Such a transfer, which is a common policy in developing countries, stimulates consumption by increasing households’ ability to pay but also typically leads to an increase in the intensity of price discrimination. We prove that the structural parameters of the model are identified from data on prices and quantities in a given market. The intuition behind this identification result is that the equilibrium price schedule in a market is a function of the distribution of consumers’ willingness and ability to pay, which, in turn, is related to the distribution of quantities. We estimate the parameters of the model using data from municipalities and localities in Mexico on three commodities, rice, kidney beans, and sugar, which are consumed by most households and are part of the evaluation component of the well-known conditional cash transfer program Progresa. The model fits the data remarkably well. Interestingly, we find that nonlinear pricing is beneficial to a large number of households, especially those who consume small quantities, relative to linear pricing. Available evidence indicates that the program had no effect on average prices. We show, however, that the program has affected the slope (in quantity) of the price schedule, which has become steeper as implied by our model, and has thus lead to an increase in the degree of price discrimination. We also show that, empirically, accounting for the impact of the hazard function of the distribution of quantities on prices, as consistent with our model, explains a large fraction of the shift in the price schedule induced by the program.

Suggested Citation

  • Orazio Attanasio & Elena Pastorino, 2015. "Nonlinear Pricing in Village Economies," NBER Working Papers 21718, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21718
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    References listed on IDEAS

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    1. Ethan Ligon & Jonathan P. Thomas & Tim Worrall, 2002. "Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 209-244.
    2. Attanasio, Orazio & Di Maro, Vincenzo & Lechene, Valérie & Phillips, David, 2013. "Welfare consequences of food prices increases: Evidence from rural Mexico," Journal of Development Economics, Elsevier, vol. 104(C), pages 136-151.
    3. Cunha, Jesse & De Giorgi, Giacomo & Jayachandran, Seema, 2011. "The Price Effects of Cash Versus In-Kind Transfers," CEPR Discussion Papers 8581, C.E.P.R. Discussion Papers.
    4. Che, Yeon-Koo & Gale, Ian, 2000. "The Optimal Mechanism for Selling to a Budget-Constrained Buyer," Journal of Economic Theory, Elsevier, vol. 92(2), pages 198-233, June.
    5. Pannarunothai, Supasit & Mills, Anne, 1997. "The poor pay more: Health-related inequality in Thailand," Social Science & Medicine, Elsevier, vol. 44(12), pages 1781-1790, June.
    6. Manuela Angelucci & Giacomo De Giorgi, 2009. "Indirect Effects of an Aid Program: How Do Cash Transfers Affect Ineligibles' Consumption?," American Economic Review, American Economic Association, vol. 99(1), pages 486-508, March.
    7. Crawford, Gregory S & Shum, Matthew, 2007. "Monopoly Quality Degradation and Regulation in Cable Television," Journal of Law and Economics, University of Chicago Press, vol. 50(1), pages 181-219, February.
    8. Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74, pages 132-132.
    9. C. N. Kuruwita & K. B. Kulasekera & C. M. Gallagher, 2011. "Generalized varying coefficient models with unknown link function," Biometrika, Biometrika Trust, vol. 98(3), pages 701-710.
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    Cited by:

    1. Brian Dillon & Joachim De Weerdt & Ted O’Donoghue, 2017. "Paying More For Less: Why Don't Households In Tanzania Take Advantage Of Bulk Discounts?," LICOS Discussion Papers 39617, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
    2. Casaburi, Lorenzo & Reed, Tristan, 2017. "Competition in Agricultural Markets: An Experimental Approach," CEPR Discussion Papers 11985, C.E.P.R. Discussion Papers.
    3. Miguel Ángel Borrella Mas & Mariano Bosch Mossi & Marcello Sartarelli, 2016. "Non-Contributory Pensions Number-Gender Effects on Poverty and Household Decisions," Working Papers. Serie AD 2016-02, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).

    More about this item

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • O22 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Project Analysis

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