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

58 Pages Posted: 2 Aug 2010 Last revised: 11 May 2023

See all articles by Ina Simonovska

Ina Simonovska

University of California - Davis; National Bureau of Economic Research (NBER)

Date Written: July 2010

Abstract

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.

Suggested Citation

Simonovska, Ina, Income Differences and Prices of Tradables: Insights from an Online Retailer (July 2010). NBER Working Paper No. w16233, Available at SSRN: https://ssrn.com/abstract=1651418

Ina Simonovska (Contact Author)

University of California - Davis ( email )

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Davis, CA 95616
United States

HOME PAGE: http://inasimonovska.weebly.com/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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