Shopping, Demand Composition, and Equilibrium Prices

74 Pages Posted: 4 Aug 2022 Last revised: 16 Jan 2024

See all articles by Lukas Nord

Lukas Nord

Minneapolis Federal Reserve Bank

Date Written: December 20, 2023

Abstract

This paper develops an equilibrium theory of expenditure inequality and price dispersion to study how retail prices respond to households' shopping behavior. The theory features incomplete markets, non-homothetic preferences, and equilibrium price dispersion for multiple varieties. Endogenous heterogeneity in the effort to search for prices shifts the price elasticity faced by retailers with the composition of demand. Retailers optimally charge higher margins for goods consumed by low-effort households. Predictions on the shape of price distributions are consistent with evidence from US scanner-data. Heterogeneity in search effort yields differences in prices paid for identical goods and reduces inequality in consumption relative to expenditure. The equilibrium response of posted prices across products doubles this direct effect of search on inequality. The model reconciles conflicting evidence on the cyclicality of retail markups and shows that the response of posted prices to a redistributive tax partially compensates net-contributors for their losses.

Keywords: Household Heterogeneity, Expenditures, Price Search, Markups

JEL Classification: D10, D31, E21, E30, L11

Suggested Citation

Nord, Lukas, Shopping, Demand Composition, and Equilibrium Prices (December 20, 2023). Available at SSRN: https://ssrn.com/abstract=4178271 or http://dx.doi.org/10.2139/ssrn.4178271

Lukas Nord (Contact Author)

Minneapolis Federal Reserve Bank ( email )

90 Hennepin Avenue
Minneapolis, MN 55401

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