Markups Across the Income Distribution: Measurement and Implications

141 Pages Posted: 2 May 2022 Last revised: 30 Nov 2023

Date Written: May 2, 2022

Abstract

I examine the relationship between customer income and firm markups using rich data on household transactions and wholesale costs. Over the observed purchases, high-income households pay 15pp higher retail markups than low-income households. Half of the markup gap is due to differences in markups paid at the same store. Conditional on income, markups paid by a household also increase when a household shops in high-income areas, shops at retail chains with locations in other high-income areas, or purchases products with a high-income customer base. A model in which household search intensity depends on opportunity cost of time can account for these facts. Consistent with the model’s predictions, I document that retail markups across cities rise with both per-capita income and inequality. Through the lens of the model, changes in the income distribution since 1950 account for a 10–14pp rise in retail markups, with 25 percent of the increase due to growing income dispersion. This rise in markups consists of within-firm markup increases as well as a reallocation of sales to high-markup firms, which occurs without any change to the nature of firm production or competition.

Keywords: Markups, Price Elasticity, Income Distribution, Search

JEL Classification: D2, D31, E31, L2

Suggested Citation

Sangani, Kunal, Markups Across the Income Distribution: Measurement and Implications (May 2, 2022). Available at SSRN: https://ssrn.com/abstract=4092068 or http://dx.doi.org/10.2139/ssrn.4092068

Kunal Sangani (Contact Author)

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

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