Seung-Hyun Hong, University of Illinois at Urbana-Champaign

This paper investigates how much markups and costs explain higher prices for high quality products and why the price premium for these products is lower in richer cities. Using scanner data on prices and quantities for baby food products, we document that the price premium for organic products relative to non-organic products is substantial in most counties, but this premium decreases in county-level income, population, and education. We estimate the random coefficients nested logit demand model for differentiated products. Assuming Nash-Bertrand pricing, we recover markups and marginal costs for products sold in each local market. We find that organic products tend to have higher costs but lower markups than non-organic products in most counties. We also find that markups (costs) are higher (lower) in rich cities than in poor cities, but this increase (decrease) in markups (costs) is smaller (larger) for organic products than for non-organic products, which is consistent with lower price premiums for organic products in richer cities. Our counterfactual analysis suggests that richer cities can accommodate more organic products, and the resulting competitive pressure reduces organic products' markups. Moreover, richer cities benefit from the reallocation of market shares to more efficient firms in the organic segment and consequently lower costs for organic products.

DATE: Friday, November 22, 2024

TIME: 3:30-5:00 p.m.

LOCATION: Fronczak 444