Competition and Consumer Discrimination

This paper studies consumer discrimination while taking into consideration the role of competition between firms, providing one of the first large-scale comprehensive analyses of consumer discrimination and market forces. We formally model consumer discrimination, where some majority-group members dislike consuming alongside minorities. In equilibrium, the non-discriminatory-to-discriminatory firm ratio is proportional to the minority-to-majority consumer ratio. Empirically, we examine how local changes in the composition of consumers altered business incentives to discriminate during the decades leading up to the passage of the Civil Rights Act of 1964. Using a nationwide data source of non-discriminatory businesses in three different industries and a research design that leverages two sources of exogenous variation in the ratio of Black-to-White consumers, we find that increases in non-discrimination were concentrated in the least competitive markets, where the threat of defection by White consumers to competing firms was lowest. We assemble new data on over 25,000 prices charged at establishments by discriminatory status and show that non-discriminatory firms charged higher prices than discriminatory firms in the same local market. Consistent with our theoretical model, this finding arises because the effects of greater competition among the more numerous discriminatory firms outweighed the discrimination markup. The results imply that monopoly power blunted the influence of consumer preferences and that Black consumers were harmed through higher prices in the non-discriminatory market.