Shopping In A Segregated City

We consider the consequences of introducing a Superstore into a city segregated by income. In this monocentric city, consumers and firms live on a continuous line interval. Our model consists of two types of firms; many high-cost perfectly competitive ”Corner Stores” located throughout the city, and one low-cost ”Superstore” located in the outer part of the city and choosing its price strategically. We look to determine the impact of the low price offered by the Superstore on the welfare of both low and high-income consumers. In addition we consider the impact of city income structure on the pricing decision of firms and monopoly profits. Regarding consumer welfare, we find that low-income consumers that are segregated away from the Superstore may still benefit from its entry into the market. More specifically, the impact of the Superstore on the isolated consumer depends on the sensitivity of the local real estate market to the entry of the Superstore and its choice of price. We also find that a greater disparity in disposable income between the two types of consumers makes it more likely that the Superstore will charge a higher price.