Are Poor Cities Cheap for Everyone? Non-Homotheticity and the Cost of Living Across U.S. Cities

104 Pages Posted: 30 Oct 2014 Last revised: 5 Dec 2019

See all articles by Jessie Handbury

Jessie Handbury

University of Pennsylvania, The Wharton School

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Date Written: June 21, 2013

Abstract

This paper shows that the products and prices offered in markets are correlated with local income-specific tastes. To quantify the welfare impact of this variation, I calculate local price indexes micro-founded by a model of non-homothetic demand over thousands of grocery products. These indexes reveal large differences in how wealthy and poor households perceive the choice sets available in wealthy and poor cities. Relative to low-income households, high-income households enjoy 40 percent higher utility per dollar expenditure in wealthy cities, relative to poor cities. Similar patterns are observed across stores in different neighborhoods. Most of this variation is explained by differences in the product assortment offered, rather than the relative prices charged, by chains that operate in different markets.

Keywords: Non-homotheticity, price index, variety, cost of living

JEL Classification: R12, R22, L81

Suggested Citation

Handbury, Jessie, Are Poor Cities Cheap for Everyone? Non-Homotheticity and the Cost of Living Across U.S. Cities (June 21, 2013). The Wharton School Research Paper No. 71; Kilts Center for Marketing at Chicago Booth – Nielsen Dataset Paper Series 1-054. Available at SSRN: https://ssrn.com/abstract=2516748 or http://dx.doi.org/10.2139/ssrn.2516748

Jessie Handbury (Contact Author)

University of Pennsylvania, The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104
United States

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