Why High-Income Households Benefit More From Product Innovations

Aug 16, 2016
Originally published on July 20, 2017 4:02 pm
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DAVID GREENE, HOST:

We know there is growing income inequality in the United States. Incomes for the wealthy are rising faster than incomes for the poor. There's also new social science research that suggests the rich might also be getting richer for another reason. And to talk about that, we're joined by NPR's social science correspondent, Shankar Vedantam. Shankar, hello as always.

SHANKAR VEDANTAM, BYLINE: Hi, David.

GREENE: So even more good news for people with a lot of money.

VEDANTAM: (Laughter) It appears so, David. This has to do with the cost of things that people buy. I was talking with Xavier Jaravel. He's a postdoctoral scholar at Stanford. He's just analyzed the prices of goods in department stores, drugstores and grocery stores - massive amount of data. He finds an important difference in changes in the price of goods purchased by wealthy people and by the poor. Here he is.

XAVIER JARAVEL: I found that the products purchased mainly by the poor were increasing in price much more quickly than those purchased by the wealthy.

GREENE: He's talking about inflation here. Stuff that people who are poor are buying - the prices of that stuff is just rising much more quickly than other stuff?

VEDANTAM: That's right. Now, obviously, he's not saying this applies to every single product on the market. But on average, he finds that inflation is rising faster for the poor than it does for the rich.

JARAVEL: Inflation is 60 basis points lower. So it's a bit more than half a percentage point of inflation difference between high-income households who make above $100,000 a year - relative to low-income households who make below $30,000 a year.

GREENE: Now, Shankar, explain this to me because we talk about the rate of inflation in a nation's economy. So I mean, to me, as a layman, I would expect all inflation to be sort of the same. Why the difference?

VEDANTAM: Well, he thinks this is happening because of competition - or rather, the lack of competition - among manufacturers who make products for the rich and those who make products for the poor. So if you're a manufacturer, David, you're paying attention to who can afford to buy the stuff that you make.

And you're also paying attention to your potential market. As income inequality has risen and wealthy people make more money, manufacturers start trying to acquire more of those customers because they are the ones with the disposable income. As more manufacturers try to compete for these customers, there's more competition and more innovation in these high-end product categories.

More competition tends to hold prices down. On the other hand, if you're making products that are largely purchased by the poor, there's less room for growth in this market, which attracts fewer manufacturers, which, in turn, means less competition and eventually higher prices.

GREENE: People have less money at the lower end. And so manufacturers are like, I'm not going to make money from that group. So I'm going to focus more on high-end.

VEDANTAM: And it's not just about having less money. It's just about the rate at which the available market is increasing or holding static. So there are large numbers of poor people, of course. But the wealthy have become wealthier very fast in recent years. And so the potential disposable income that the wealthy have is growing very rapidly, which suggests that there's an appetite for manufacturers to reach those customers.

GREENE: More competition, then, keeps the prices at the high-end down. Is there an example you could give us here?

VEDANTAM: Yeah. One good example turns out to be beer. The size of the craft beer market, which caters to wealthier people, is exploding at about 20 percent a year. On the other hand, the market for big-name beers, like Miller, for example, is growing maybe 1 to 2 percent a year. Now, lots of manufacturers want a piece of the craft beer market.

Jaravel told me that as a result of all the competition in the craft beer market, craft beer prices are rising more slowly than big-name beers, which are largely consumed by poorer people. So effectively, the rich are not just seeing their incomes rise more quickly than the poor. They're seeing the prices of the things they buy rise more slowly than do the poor - both of which, of course, collectively exacerbate income inequality.

GREENE: You know, like a cruel irony here - it seems like.

VEDANTAM: It does, indeed.

GREENE: Shankar, thanks as always.

VEDANTAM: Thank you, David.

GREENE: That is a voice you hear often on this program, Shankar Vedantam, NPR's social science correspondent. He is also the host of a podcast that explores the unseen patterns in human behavior. It is called Hidden Brain. Transcript provided by NPR, Copyright NPR.