Income Differences and Prices of Tradables: Insights from an Online Retailer

Abstract

I study the positive relationship between prices of tradable goods and per-capita income. I develop a highly tractable general equilibrium model of international trade with heterogeneous firms and nonhomothetic consumer preferences that positively links prices of tradables to consumer income. Guided by the model's testable prediction, I estimate the elasticity of price with respect to per-capita income from a unique dataset that I construct, which features prices of 245 identical goods sold in 29 European, Asian, and North American markets via the Internet by Spain's second largest apparel manufacture-Mango. I find that doubling a destination's per-capita income results in an 18% increase in the price of identical items sold there. Per-capita income differences account for a third, while shipping cost differences can explain up to a third of the crosscountry price variations of identical items purchased via the Internet by consumers who do not take advantage of quantity discounts. The price elasticity estimates compare favorably to estimates that I obtain from a standard dataset that features prices across retail locations around the world, suggesting that variable markups play a key role in accounting for observed crosscountry differences in prices of tradables.

Toward a theory of monopolistic competition

“…For example, by nesting quadratic preferences into a quasi-linear utility, Melitz and Ottaviano (2008) show that prices depend on market size but suppress the per capita income eect. Markups depend on per capita income under the linear expenditure system in an open economy (Simonovska, 2015), but this eect disappears in a closed economy under additive preferences (Zhelobodko et al, 2012). Under indirectly additive preferences, there is an income eect, but market size has no impact on prices (Bertoletti and Etro, 2015).…”

Demand complementarities and cross‐country price differences

“…Consistent with the demand complementarities hypothesis, electric goods exhibit a statistically significant above-average dependence on electricity consumption and a below average dependence on income per capita. When conditioning on the interaction with GDP, a 100% increase in electricity consumption is associated with a 12.0% increase in the price of electric goods (column 4) This magnitude is slightly larger than markup elasticities with respect to GDP in Alessandrai and Kaboski (2011) and Simonovska (2015). Columns 5 and 6 show that values and quantities of electric goods also exhibit an above-average differential dependence on electricity consumption, consistent with the theory's prediction that high catalyst consumption is associated with outward shifts in the demand curves for tradable consumer goods that increase quantities and reduce the price elasticity of demand.…”

Product Differentiation, Competitive Toughness, and Intertemporal Substitution

“…This leads to a big loss of tractability, which makes the task of obtaining clear-cut analytical results apparently hopeless. Using simulations, we demonstrate in Online Appendix B that, under two widely used specifications of non-homothetic additively separable preferences -CARA (Behrens and Murata, 2007) and Stone-Geary-type preferences (Simonovska, 2015) -the equilibrium behavior is qualitatively 14 These include subutilities associated with the symmetric translog expenditure functions (Feenstra, 2003), in which case σ(n t ) = 1 + γn t with γ > 0, or, more generally, homothetic preferences with a single-aggregator (HSA), studied recently by Matsuyama and Ushchev (2017). 15 We expect the analysis to become even more complex if we extend it to the case of even broader families of demand systems, such as the one used by Arkolakis et al (2018). the same as in the homothetic case, whenever a steady state exists and is unique.…”