Poor pay more for everyday goods because stores they shop stock fewer new products, study says

Poor people pay more for everyday purchases, says a study by Harvard University graduate student Xavier Jaravel. He found "that prices are increasing by more than 2 percent a year on average for goods purchased by consumers with household incomes under $30,000, but by just 1.4 percent annually for those with incomes above $100,000," Max Ehrenfreund reports for The Washington Post. "While apparently small, that divergence—if it continues—would become hugely important in a relatively short period of time. After 20 years, for example, every dollar in the pocket of a poor consumer would be worth just 88 cents compared to what a wealthier consumer would be able to buy with it at the grocery store, given the differences in inflation and in both consumers' preferences."

Those numbers are especially bad news in rural areas, where residents are poorer and often have less access to big discount stores. Poor people with less money to spend each week buy items such as toilet paper in smaller packages, "increasing the prices they pay," Ehrenfreund writes. "In addition, poor families must rely on a whole range of alternative financial services, which might charge exorbitant fees and expose customers to serious risks." (Post graphic)

The study found that the difference between what poor and rich people pay for products "resulted from the fact that within specific kinds of products—beef jerky, say, or tortilla chips—more affluent consumers were buying premium brands, and those brands' prices were more stable over time," Ehrenfreund writes. Jaravel "found that relatively few new products made it into stores that weren't premium goods. In other words, poorer consumers were more likely to be buying the same products from year to the next. When a new product arrives on shelves, retailers typically have to discount the price of older products somewhat. Using data on markups from a large national grocer with a few hundred stores, Jaravel found that the absence of new products for poorer consumers allowed grocers to increase the prices on the old products more from year to year."

"Jaravel's research contradicts a couple of assumptions that economists typically make about consumer goods," Ehrenfreund writes. "One is that when new kinds of products are introduced, they'll be purchased mainly by the wealthiest consumers, who will pay higher prices for them. Over time, prices will fall, and less affluent consumers will purchase the goods at lower prices. Jaravel found little evidence of that pattern in the data. Whole categories of new, premium products never made it into the shopping cart for poorer families." (Read more)