On groceries.

An anonymous reader emails:

I have an economics-related question that stemmed from a pretty interesting article I just read on the cost of living in NYC.

My question is this: On page one of the article, the author quotes some research stating, “…for households earning above $100,000, grocery costs are 20 percent lower in cities with a high per-capita income (like New York) than in cities with a low per-capita income (like New Orleans).”

But then on page two of the same article, the author quotes different data from the same study, “…a household earning $15,000 a year faces approximately 20 percent higher grocery costs in cities with relatively high per-capita income.”

I don’t understand how grocery costs can be higher or lower for one socioeconomic group than another. If Person A making $100,000 a year and Person B making $15,000 a year both shop at the same store, would the prices not be the same for each person? I know obviously Person A is more likely to shop at an upscale/ more expensive store than Person B, especially in a city like New York, but there are only so many grocery chains to choose from, and I’ve found from working in grocery stores that I daily come across an equal number of people from both ends of the spectrum that shop at the same chain with the same prices. I’m sure I’m missing something obvious, but I don’t see how these two statistics can coexist simultaneously. Thoughts? [Emphasis added by VDV.]

Let’s address the first statistic first. Remember that this statistic compares rich people in rich cities (such as NYC) to rich people in poor cities (such as New Orleans). Because NYC is such a rich city, a lot of fancy grocery stores open and compete for rich customers. The competition is intense enough that it puts significant downward pressure on the price of expensive groceries. On the other hand, New Orleans is a comparatively poor city, so you’ll see proportionately fewer fancy grocery stores open. They don’t have to compete as hard for rich customers, so that downward pressure on prices isn’t as great as it would be in NYC. Thus, rich New Yorkers have a lower grocery bill than rich New Orleanians. This is the explanation offered by the author and researcher on page one of the article.

Now on to the second statistic: “a household earning $15,000 a year faces approximately 20 percent higher grocery costs in cities with relatively high per-capita income.” I assume that this is in comparison to poor households in relatively poor cities (the author doesn’t go into as much detail with this statistic, which is a bit disappointing). There are several possible explanations for this, but let me give you the simplest one I can think of– which is essentially the same as the explanation for the first statistic. Watch this:

Because New Orleans is such a poor city, a lot of inexpensive grocery stores open and compete for poor customers. The competition is intense enough that it puts significant downward pressure on the price of inexpensive groceries. On the other hand, NYC is a comparatively rich city, so you’ll see proportionately fewer inexpensive grocery stores open. They don’t have to compete as hard for poor customers, so that downward pressure on prices isn’t as great as it would be in New Orleans. Thus, poor New Orleanians have a lower grocery bill than poor New Yorkers.

Now go back to the boldfaced part of your email. You didn’t miss the “something obvious” that helps explain it– rather, you typed the “something obvious” and then ignored it. On average, the rich and the poor buy different groceries (you acknowledged this at first) and on average, they go to different stores. That plus understanding competition plus understanding that different income groups are different sizes in different cities equals a plausible explanation for the simultaneous coexistence of these statistics.

You said “there are only so many grocery chains to choose from”. [Note my use of logical quotation.] This is true, but remember, “only so many” is relative. In NYC, there are relatively many rich groceries to choose from. That’s good for the rich consumer. In New Orleans, there are relatively few rich groceries to choose from. That’s bad for the rich consumer. That explains the cost disparity facing rich folks.

On the flip side, in NYC, there are relatively few inexpensive groceries to choose from. That’s bad for the poor consumer. In New Orleans, there are relatively many inexpensive groceries to choose from. That’s good for the poor consumer. That explains the cost disparity facing poor folks.

I hope this helps.

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