Because of Monopolies, Income Inequality Significantly Understates Economic Inequality

James Schmitz

No 777, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: In social science research, household income is widely used as a stand-in for, or approximation to, the economic well-being of households. In a parallel way, income-inequality has been employed as a stand-in for inequality of economic well-being, or for brevity, "economic-inequality." But there is a force in market economies, ones with extensive amounts of monopoly, like the United States, which leads income-inequality to understate economic-inequality. This force has not been recognized before and derives from how monopolies behave. Monopolies, of course, raise prices. This reduces the purchasing power of households, or the value of their income. But monopolies, in fact, reduce the purchasing power of low-income households much more than high-income households. What has not been recognized is that, in many markets, as monopolies raise the prices for their goods, they simultaneously destroy substitutes for their products, low-cost substitutes that are purchased by low-income households. In these markets, then, while high-income households face higher prices, low-income households are shut out of markets, markets for goods and services that are extremely important for their economic well-being. It often leaves them with extremely poor alternatives, and sometimes none, for these products. Some of the markets we discuss include those for housing, financial services, and K-12 public education services. We also discuss markets for legal services, health care services, used durable equipment and repair services. Monopolies that infiltrate public institutions to enrich members, including those in foster care services, voting institutions and antitrust institutions, are also discussed.

Keywords: Inequality; Well-being; Income inequality; Consumption inequality; Monopoly; Antitrust; Housing crisis; Public education; Credit cards; Repair services; Sabotage (search for similar items in EconPapers)
JEL-codes: D22 D42 K0 K21 L0 L12 (search for similar items in EconPapers)
Pages: 54
Date: 2021-03-09
New Economics Papers: this item is included in nep-com and nep-pke
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:90187

DOI: 10.21034/wp.777

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