Price Heterogeneity and Consumption Inequality

Abstract

Using the Nielsen Consumer Panel, we document the presence of significant price heterogeneity in the United States. Poor households pay lower prices for the same products, mostly because they shop more at discount stores. However, we also find that price heterogeneity has a very small impact on the measurement of consumption inequality. Adjusting nominal household expenditures by imposing that all products have the same price does not appreciably reduce consumption inequality in the United States. Finally, we decompose our inequality measure into two factors, measuring differences in the composition and size of consumption baskets. Variations in composition and quantity are both very important in explaining consumption inequality, and the two factors appear to be highly correlated.

Keywords: Price Heterogeneity, Consumption Inequality

JEL Classification: E32, D20, C30