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

Ina Simonovska

The Review of Economic Studies, 2015, vol. 82, issue 4, 1612-1656

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 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 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.

Keywords: LOP failure; Variable mark-ups; Non-homothetic preferences; Online retail (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (160)

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Working Paper: Income Differences and Prices of Tradables: Insights from an Online Retailer (2010)
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