State of the Industry

Residents of Poor Neighborhoods Pay 12.2% More For groceries

I

n a large urban center, supermarkets and hard discount grocers do not charge the same prices. Grocery prices are higher in poor neighborhoods than in rich ones. This may be because transportation is more expensive in poor neighborhoods. Lower transportation costs, however, do not make rich neighborhoods cheaper than poor ones, on average. In a city, people choose where to shop based on the price, and grocery stores choose what prices to charge based on how many people they think will come to shop. The disparity was found to be around 12.2% which implies for every dollar spent in a more affluent neighborhood closer to the city center, poor neighborhoods spent around 87.8 cents.

The Effect Of Distance On Price

The prices of groceries are lower in the center of the city. This difference in price is not related to the quality of the groceries. The results of this study show that residents of the peripheral neighborhoods are not taking advantage of the lower prices of groceries in the center of the city. There are a number of reasons why this might be the case. Some of these reasons include transportation costs and problems associated with carrying groceries home. This is referred to as spatial friction.

Suburban Sprawl Hurts Consumers

The presence of spatial frictions is a key determinant of the city’s retail prices because it shapes the composition of demand faced by retailers. When travel is costly, households that continue shopping in the expensive neighborhoods are those whose idiosyncratic shocks favor shopping there. Retailers in these neighborhoods therefore face a less elastic demand prompting them to raise prices, providing a countervailing force that diminishes the competitive force. The elderly and younger couples are disproportionately more likely to be affected by these issues.

Final Thoughts

The impact of distance from major commercial hubs needs continued investigation to understand the impact on US based neighborhoods especially considering this study was done on 15 neighborhoods in Israel. The study seems indicative of a pattern agnostic of the country; however, we would like to see a similar study conducted here in the US for the sake of replicability. Issues with suburban sprawl aren't new and have been the topic of conversation for some time. What is interesting is the direct impact on retailers who target these neighborhoods.ccording to a a study published in the American Economic Journal suggests grocery prices in neighborhoods that are far away from the center of the city are higher than the prices in the neighborhoods that are close to the center of the city.

Sources

Eizenberg, Alon, et al. “Retail Prices in a City.” American Economic Journal: Economic Policy, vol. 13, no. 2, 2021, pp. 175–206., doi:10.1257/pol.20180218.

Alexander Melton
Founder and CEO of Wyrmix
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