Essays on Prices and Variety Across Cities
type: CreativeWork
description: In Krugman (1991), agglomeration is driven by consumption externalities related to differences in the average price across locations. Variety plays a central role here: the price index is lower in larger cities because more varieties are produced there, but all products are available everywhere, so there are no direct consumption gains from variety. Chapter 1 extends this model to allow for these variety differences across cities via an extensive margin of intercity trade. In this model, scale economies yield more production variety in larger cities so that, with positive trade costs, consumers in these locations can benefit from two consumption advantages - lower average prices and more varieties of products. This model sets the stage for the empirical chapters that measure the impact of these consumption benefits on consumer utility. The urban economics literature has paid relatively little attention to these consumption externalities for two reasons. First, the fact that wages are higher in larger cities indicates, in the context of a spatial equilibrium model, that purchasing power must be lower in these locations, which is inconsistent with the NEG theoretical predictions that price indexes are lower in larger cities. Second, there are reasons to believe that intranational trade frictions are much smaller than those across international borders. While there is a large body of work documenting that these frictions yield significant variation in the prices charged and varieties offered across different countries, we know relatively little about the spatial variation of price and variety in a domestic context. Chapter 2, co-authored with David E. Weinstein, addresses both of these issues. We first show that, controlling for purchaser demographics and store amenities, the prices of tradable products do, in fact, vary across cities as predicted by Krugman (1991). Additionally, we find that there are significant differences in the variety of products offered in large…
abstract: In Krugman (1991), agglomeration is driven by consumption externalities related to differences in the average price across locations. Variety plays a central role here: the price index is lower in larger cities because more varieties are produced there, but all products are available everywhere, so there are no direct consumption gains from variety. Chapter 1 extends this model to allow for these variety differences across cities via an extensive margin of intercity trade. In this model, scale economies yield more production variety in larger cities so that, with positive trade costs, consumers in these locations can benefit from two consumption advantages - lower average prices and more varieties of products. This model sets the stage for the empirical chapters that measure the impact of these consumption benefits on consumer utility. The urban economics literature has paid relatively little attention to these consumption externalities for two reasons. First, the fact that wages are higher in larger cities indicates, in the context of a spatial equilibrium model, that purchasing power must be lower in these locations, which is inconsistent with the NEG theoretical predictions that price indexes are lower in larger cities. Second, there are reasons to believe that intranational trade frictions are much smaller than those across international borders. While there is a large body of work documenting that these frictions yield significant variation in the prices charged and varieties offered across different countries, we know relatively little about the spatial variation of price and variety in a domestic context. Chapter 2, co-authored with David E. Weinstein, addresses both of these issues. We first show that, controlling for purchaser demographics and store amenities, the prices of tradable products do, in fact, vary across cities as predicted by Krugman (1991). Additionally, we find that there are significant differences in the variety of products offered in large…
author: Handbury, Jessie Helen
language: English
keywords: Economics
date published: 2012
date modified: 2026-07-24T01:44:23Z
provider: Columbia University
publisher: Networked Digital Library of Theses and Dissertations
type: WebPage
source organization: Columbia University

PropertyValue
property ID: DOI
value: 10.7916/D8H99C8B