When the Baby Cries at Night: Inelastic Buyers in Non-Competitive Markets
57 Pages Posted: 21 Jun 2013
Date Written: June 20, 2013
We study an inflow of buyers who are less elastic because they lack both time and information. Theory predicts that sellers increase prices to expand surplus appropriation, even if marginal costs are non-increasing, but this effect weakens as market competition intensifies. Data from Italian pharmacies confirm these predictions. Monthly fluctuations in the number of newborns at the city level generate exogenous changes in the number of less elastic buyers (the parents) who consume hygiene products demanded by more experienced and elastic consumers as well. We estimate that the number of newborns has a positive effect on equilibrium prices even with non-increasing marginal costs. We exploit legislation that fixes the number of pharmacies that should serve a city as a function of the existing population. Using RDD meglio scriverlo per esteso, we find that an increase in competition has a significant and negative effect on the capacity of sellers to extract surplus from less elastic buyers.
Keywords: demand elasticity, consumer’s information, price competition, pharmacies, regression discontinuity
JEL Classification: D43, D83, L13
Suggested Citation: Suggested Citation