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By Babak Somekh


Using a supply/demand consumer model with search, we show under what conditions the distribution of income within a community is related to the type of firms that exist within that community, impacting the level of prices. We argue that searching for the lowest price costs both time and money to the consumer. If time and money costs are high enough low income consumers cannot afford the monetary cost of search, while wealthy consumer are not willing to take the time to look for the lowest price. The middle class have the right balance of time and money cost of search and therefore are the most aggressive shoppers. We use a supply side model of firm size and pricing strategy to demonstrate that firms located in more informed communities are more likely to enter the market as large low cost retailers. By connecting these two results we show under what conditions the size of the middle class can have a negative relationship with the level of prices in a local market.

Year: 2010
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