Shopping, Demand Composition, and Equilibrium Prices

51 Pages Posted: 4 Aug 2022

See all articles by Lukas Nord

Lukas Nord

European University Institute - Department of Economics

Date Written: June 29, 2022

Abstract

This paper studies the implications of equilibrium interactions between the shopping behavior of heterogeneous households and retailers’ price posting. Heterogeneous consumption baskets along the income distribution and higher shopping effort of the poor imply that retailers face different price elasticities depending on their customer base and charge higher markups for goods disproportionately consumed by richer households. First, I formalize this mechanism in a standard model of frictional product markets and derive testable predictions on the shape of price distributions as a function of search effort. Second, I confirm these predictions using supermarket scanner data from the US. Third, I embed the simple framework into a rich incomplete markets model featuring heterogeneous households with non-homothetic preferences as well as endogenous price distributions for multiple varieties. The calibrated model shows that equilibrium interactions between shopping effort, demand composition, and price posting double the contribution of shopping effort to expenditure inequality relative to previous findings. The model also implies that the response of markups to aggregate income shocks crucially depends on the incidence of the shock along the income distribution.

Keywords: Household Heterogeneity, Expenditures, Price Search, Markups

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

Suggested Citation

Nord, Lukas, Shopping, Demand Composition, and Equilibrium Prices (June 29, 2022). Available at SSRN: https://ssrn.com/abstract=4178271 or http://dx.doi.org/10.2139/ssrn.4178271

Lukas Nord (Contact Author)

European University Institute - Department of Economics ( email )

Italy

HOME PAGE: http://lukasnord.eu

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