Price Heterogeneity and Consumption Inequality

Abstract

Measures of consumption inequality are often derived from data on expenditures rather than consumption itself. We document that households systematically pay different prices for identical products, and that this price heterogeneity is closely related to household income: lower-income households pay lower prices than higher-income ones for the same product. Such heterogeneity might have a considerable impact on the measurement of consumption inequality: if poor households pay lower prices than rich households, existing measures of nominal consumption inequality may be biased upwards. However, we provide empirical evidence that price heterogeneity does not matter for the measurement of consumption inequality; in other words, we do not find evidence of a significant discrepancy between nominal and real inequality.

Keywords: Consumption Inequality, Price Heterogeneity, Nielsen Consumer Panel

JEL Classification: E21, E31, D20, C30