Budget Constrained Consumers and Pricing

27 Pages Posted: 7 Sep 2011 Last revised: 10 Jan 2016

See all articles by Arghya Ghosh

Arghya Ghosh

UNSW Australia Business School, School of Economics

Alberto Motta

UNSW Australia Business School, School of Economics

Date Written: January 9, 2016

Abstract

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

Ghosh, Arghya and Motta, Alberto, Budget Constrained Consumers and Pricing (January 9, 2016). Available at SSRN: https://ssrn.com/abstract=1923558 or http://dx.doi.org/10.2139/ssrn.1923558

Arghya Ghosh (Contact Author)

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

Alberto Motta

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

HOME PAGE: http://https://sites.google.com/site/albertomottaeconomics/

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