goods; we label the variation in how consumers allocate their funds among these different categories as “across-stratum” heterogeneity.

Consumer behavior exhibits a second kind of heterogeneity. Within any given stratum of goods, different people buy widely different qualities and brands of goods, often shop at different kinds of retail outlets, and pay different prices for the same product. The price of housing varies a great deal from one part of the United States to another, as well as between the city and the countryside. Different patients pay widely different prices for the same medical treatment. Also, shopping outlets offer goods and services at non-identical prices; catalog stores may tailor their prices to the zip code of the purchaser. The spread of Internet shopping may bring prices closer together, because it makes arbitrage easier, or it may drive them further apart by allowing retailers to set prices more nearly in accordance with the characteristics of the shopper. These within-stratum differences, too—like those across strata—arise not only from idiosyncratic heterogeneity of tastes, but also from differences in age, income, family composition, geographical location, and other factors that have important social implications. Within almost every category of goods the poor choose less expensive and lower-quality brands, often shop in different stores, eat at different types of restaurants, and may pay different prices for the same good. Retirees are more likely to travel on group tours than take bicycling excursions and, within the BLS stratum “sporting equipment,” to buy golf clubs instead of soccer balls or skateboards. And they may get senior citizens’ discounts on many items, whose scope and value can change from time to time.

It is also quite possible that the ability or willingness of an individual to substitute in response to changes in relative prices differs depending on the level of that individual’s income. In consequence, the magnitude of the substitution effect built into a cost-of-living index (COLI) may differ from one person to another, depending upon their income levels. The research on this topic contains many presumptions on how substitution varies with income, but remarkably little evidence. Some researchers argue that, precisely because of limited resources, the poor are more careful with their budgets, hunting out bargains, substituting to the maximum extent possible. Others point out that the poor buy a smaller range of goods—a phenomenon that is well documented empirically—and, therefore, have less scope for substitution among goods. Moreover, the poor consume more necessities, formally defined as goods whose demand rises less than in proportion to income, and the term suggests that at least some necessities are hard to substitute. Certainly, for such items as medical care or home heating oil, it is hard to substitute one item for another, especially in the short run. Conceivably, both of these kinds of forces could influence different aspects of the shopping behavior of people with low incomes, but there is nothing in the theory of consumer behavior that creates a presumption that the balance tips one way or the other.

The National Academies of Sciences, Engineering, and Medicine
500 Fifth St. N.W. | Washington, D.C. 20001

Copyright © National Academy of Sciences. All rights reserved.
Terms of Use and Privacy Statement