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

• Published in: The Review of economic studies 2015-10, Vol.82 (4 (293)), p.1612-1656
• Main Author: SIMONOVSKA, INA
• Format: Article
• Language: English
• Subjects: Electronic commerce; Equilibrium; Income; International trade; Mango-MNG Consolidated Group; Per capita; Price elasticity; Spain; Studies
• ISSN: 0034-6527; 1467-937X
• DOI: 10.1093/restud/rdv015

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 data set 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 manufacturer—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, whereas 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 favourably to estimates that I obtain from a standard data set 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.