The Missing Middle in Product Price Distribution
63 Pages Posted: 22 Jul 2021 Last revised: 23 Jul 2021
Date Written: July 20, 2021
The IO literature has typically studied the supply-side factors that determine the price structure of products/services competing in a market. This paper proposes that the demand-side demographics could play an important role in shaping the product price structure. In particular, we document a ``missing middle'' phenomenon in both the income and the product price distributions in the U.S., based on the IPUMS ACS dataset (2005--2017) and the Nielsen Retail Scanner Data (2006--2017), for a large set of goods sold in the U.S. at the national, state, or commuting-zone level. We show that the lagged population share of the middle-income class has a positive impact on the market share (in quantity) of middle-priced varieties (and respectively so for the low/high income and price group), after controlling for product category and state (or commuting zone) fixed effects. The impacts are further stronger in commuting zones of higher population density. We then evaluate the cost-of-living implications of the observed missing-middle phenomenon, taking into account product entry, exit, and pro-competitive price effects of continuing products, in a framework that allows for non-homothetic preferences across income groups with respective to the price groups. We find that ignoring the non-homothetic demand structure and the missing-middle phenomenon understates the rise in the cost of living for the period 2006--2017. The downward bias is sizable (as large as 2 percentage points out of 11--13% increase in the cost of living for the period), and particularly noticeable for the middle-income households.
Keywords: missing middle, price and income distribution, demand demographics, cost of living, entry/exit
JEL Classification: D12, D31, D61, J11, L11
Suggested Citation: Suggested Citation