Reference no: EM132461518

Imagine you are a worker looking to achieve some particular standard of living. Would you have the same wage requirements if you were forced to live in New York City as you would if you were forced to live in Dubuque, Iowa? Probably not. NYC is a lot more expensive place to live, even holding constant the better theater and food and other entertainment options. It costs more to eat in NYC than Dubuque. It costs more to commute in NYC than Dubuque and so on.

And obviously, consumers of different levels of wealth and well-being populate different parts of the country.

So here is a puzzle. There are many retail chains which have locations scattered about the entire United States. If you were interested in making profits, would you charge the same price (or nearly the same price) at every one of your locations across the US? Or, would you charge more or less according to the average income and preferences and macro-economic conditions of different consumers in different places? Recently, economists have found that most large retail chains in the US do, in fact, charge substantially similar prices across all of their locations. They also suggest that profits might be higher if their behavior were different. So, that presents a puzzle.[1] The authors also show that for certain brand -name products in the US and in many European stores, if retailers charged more when incomes were higher, profits would increase by as much as SEVEN percent! Use what you know about economics to posit your own theory about what may resolve this puzzle without admitting that firms everywhere and all the time are leaving cash on the table?