Polarization & pricing to the rich

Abstract

Income polarization directly affects monopoly pricing and profits when a monopolist cannot segment markets. When income and price elasticity of demand are negatively correlated, increasing income disparity ultimately leads the monopolist to target the rich at the exclusion of the poor. This paper uses a simple model to demonstrate how income polarization, as distinct from income inequality, affects monopoly price and profit in such a situation. Without income polarization, price increases and profit decreases with income disparity when the monopolist targets the rich. With income polarization, price increases sharply and profit increases with income disparity when the monopolist targets the rich. Preliminary evidence suggests that pharmaceutical prices may indeed increase with polarization.

Notes

¹ Others focus on the link between median income and prices and find poverty to be generally uncorrelated with prices (e.g. Goodman, 1968).

² Indeed, if V(I, q) = u(I) + q − (1/2)q ² and u(I) = ln(I), then a ≈ I ∼ U [l − x, 1 + x] and income disparity between the richest and poorest market is 2x (Malueg and Schwartz, 1994).

³ Defined by Π _{Z 3}(x* ^L ) = Π_Z2(x* ^L ) and Π_Z2(x* ^M ) = Π_Z1(x* ^M ).

⁴ Source: Maskus (2001) who uses IMS Health data.

⁵ Source: Duclos et al. (2004).

⁶ Source: Deninger and Squire (1996).

⁷ Since the Gini index and polarization indices in Table 1 were estimated using different data, there is a slight difference between Gini and Z(0) in the data used here.