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

• Published in: NBER Working Paper Series 2010-07, p.16233
• Main Author: Simonovska, Ina
• Format: Article
• Language: English
• Subjects: Consumers; Consumption; Datasets; Economic theory; Estimates; Exports; International trade; Internet; Price elasticity; Price levels; Retail stores
• ISSN: 0898-2937
• DOI: 10.3386/w16233

Working Paper No. 16233 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 non-homothetic 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 cross-country 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 mark-ups play a key role in accounting for observed cross-country differences in prices of tradables.