Do the Poor Face Higher Prices?

The poor have less income than others. But do they also pay higher prices? This is not obvious. Indeed, the rich often pay more by shopping in posh markets. However, they typically buy higher-quality goods too. The question remains, do the rich pay more or less than the poor for identical goods?

Research by Vijayendra Rao, published recently in Review of Income and Wealth, suggests that the poor do indeed pay more. Why? Because, says Rao, they lack ready cash, and so buy tiny quantities instead of what shopkeepers regard as normal quantities. For such tiny quantities, shopkeepers typically charge more per gram. Indeed, the same shopkeepers will also offer discounts for bulk purchases. Rao believes the poor suffer from a double disadvantage: They have less income and face higher prices too.

He surveyed the poor potter caste in three Karnataka villages. Most of them have become agricultural labourers. His survey shows a substantial difference between prices paid by potters and other villagers. In consequence, real inequality in these villages is 12 to 23 per cent higher than if all faced the same prices.

Rao admits that it would be unwise to read to much into a study of one community in three villages: More research is needed to confirm his findings. Meanwhile, we need to discuss how plausible his findings are.

The main problem of the very poor, says Rao, is that they lack liquid cash, and live hand to mouth. Fair price shops require that consumers buy rations in one go once a month, and the very poor lack ready cash for such bulk buying. Rao finds that the poor pay no more than others for staples like rice, cooking oil and many vegetables. But they buy very small quantities of pulses or legumes, for which they pay a premium price. This is also true of other items bought in very small quantities.

Middle class readers will not be surprised. They, too, know that whatever you buy, whether chocolate or ice cream or paint, the cost per gm is always higher for a small pack than a large one. A sachet of shampoo costs more per ml than a full bottle.

Why, then, do poor people usually buy small packs instead of large? Rao thinks that it is the lack of ready cash. But I am not convinced. The demand for agricultural labour is highly seasonal–there are peaks at harvest and sowing time, and long slack periods in between, especially in rainfed areas growing only one crop per year. Labourers in these conditions clearly save money in the high-wage seasons to tide over the leanest months. Families capable of smoothing over such large financial gaps should surely be able to buy enough pulses per shopping trip to avoid price penalties.

All studies show that the poor spend significant sums on social occasions and festivals. Here again their pattern of spending is lumpy, with peaks and troughs. This again suggests that they generate cash surpluses at some times of the year to meet the spending bulge at festivals. People used to managing surpluses and deficits like this should be able to buy 250 gm of pulses at a time to avail of normal prices.

Joint shopping by several families can ensure scale economies in buying, yet it is not common. Rao ascribes this to difficulties in co-ordination. Yet the caste system has endured for millennia precisely because castes are good at co-ordinating community action for mutual benefit. If substantial savings were possible by co-ordinated shopping, I would expect it to become the rule.

Can there be any other explanation? Yes indeed. Even a middle class family will buy only one bar of chocolate rather than buy 20 bars to get a discounted price. Well-off families often buy food in modest quantities, enough to last just one day. Why do they forego discounts on bulk buying? For many reasons, but an important one is expenditure control. They feel that if they buy chocolates or ice-cream in bulk, they will end up consuming more than they originally intended to. So the ostensible financial saving turns out to be illusory. A big tube of toothpaste costs less per gram, but each inch of squeezed toothpaste now has more volume, so overall spending on toothpaste may actually go up.

For the middle class, buying in small packs is explained by expenditure control strategy, not lack of ready cash. Can this also explain the purchase of small quantities of pulses and legumes by the very poor? Rao does not think so: He feels expenditure control is not a plausible strategy for basic foods.

I am not so sure. Middle class readers may view pulses and legumes as basic foods. But many studies show that the very poor eat nothing, but curried cereals in most meals. For them, even pulses and legumes constitute superior foods. I find it striking that the Rao’s potters bought enough rice, cooking oil and vegetables to qualify for the normal price. Clearly these are the foods they regard as essential. I suspect their attitude to legumes is not unlike the middle class attitude to ice cream.

Rao’s survey shows that higher prices are paid not only by the very poor, but also by those with more land, who certainly do not lack ready cash. Indeed, this looks more like shopkeepers charging what they think different consumers will bear, and so charging the rich a bit more (but not so much that they protest).

I suspect Rao’s explanation captures part of the truth. In that case, several things follow. First, the absolute level of poverty may be higher than indicated by official data. Second, the fall in poverty over time is more dramatic than official data shows, since higher incomes mean not only more cash, but lower prices too. Third, large families have scale economies–they will buy enough of each commodity to qualify for normal prices–and this may be additional reason why the poor favour larger families. Fourth, the real value of child labour carries a premium, because the extra income also reduces prices. If so, this is an additional incentive for child labour. An interesting set of propositions. I hope some researchers will dig deeper.

What do you think?