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Pricing Inequality

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  • Simon Mongey
  • Michael E. Waugh

Abstract

This paper studies household inequality and product market power in dynamic, general equilibrium. In our model, households’ price elasticities of demand endogenously vary with wealth. Heterogeneous firms set their price as oligopolistic competitors given the endogenous distribution of demand. A firm’s market power varies with the distribution of demand as households with different elasticities sort into high- and low-price varieties. Under standard preferences, larger firms’ products are more appealing, sell at higher prices, to more households, and a relatively richer customer base, face less elastic demand, and set higher markups. Quantitatively (a) our model rationalizes a wide set of recent empirical studies in the cross-section of households and firms, (b) we find household heterogeneity to be a dominant source of markup variation across firms, and (c) a one-time fiscal transfer of one percent of GDP to households leads to a 0.3 percentage point increase in the aggregate markup.

Suggested Citation

  • Simon Mongey & Michael E. Waugh, 2025. "Pricing Inequality," NBER Working Papers 33399, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33399
    Note: EFG IO PR
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    More about this item

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • L0 - Industrial Organization - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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