Budget Constrained Consumers and Pricing
27 Pages Posted: 7 Sep 2011 Last revised: 10 Jan 2016
Date Written: January 9, 2016
We look at imperfectly competitive markets where some consumers might be budget constrained. The set of budget constrained consumers varies endogenously with price. While the presence of such consumers reduces aggregate demand, we find that the equilibrium price under budget constrained demand is often higher than the equilibrium price under standard demand. The relationship between the two equilibrium prices depends on the elasticity of the standard demand, technology, and market structure. Both when market structure is exogenously given (e.g., monopoly, oligopoly) and endogenously determined (e.g., free entry), we find that lack of competition and inefficient technology generate a higher equilibrium price under constrained demand.
Keywords: budget-constrained, elasticity, oligopoly pricing
JEL Classification: D43, L13
Suggested Citation: Suggested Citation