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Heterogeneity in Consumer Preferences and its Influence on Parameters of the Markets under Monopolistic Competition

Student: Kseniya Pochueva

Supervisor: Alexander Osharin

Faculty: Faculty of Economics

Educational Programme: Bachelor

Year of Graduation: 2014

<p>This paper examines the influence of consumer preferences heterogeneity on parameters of the markets under monopolistic competition. The main purpose of this work is to test the hypothesis that differences in consumer preferences, stemming from income dispersion, bear significant influence on parameters of the monopolistically competitive markets.</p><p>The study of the problem was realized in several steps. Firstly, the analysis of the existing models of monopolistic competition taking into account consumer preferences heterogeneity was conducted. Secondly, the data that was necessary for empirical estimation of consumer preferences heterogeneity including data on income and its distribution within different countries was collected. Finally, the statistical analysis of the collected data was carried out to discover the relationship between market parameters and consumer preferences affected by income.</p><p>The empirical analysis was divided into two parts. In the first part the price elasticities of demand of Russian consumers for clothing and alcoholic beverages were estimated by using quarterly data on average incomes and expenditures of households divided into ten income groups and prices for particular product categories. The data covered the period from first quarter of 2009 to last quarter of 2013 and were sourced from the databases of Goscomstat and CEIC. The results clearly show that price elasticity of demand for clothing rises along with increase of disposable income, while the price elasticity of alcoholic beverages decreases. This means that consumer preferences depend upon the disposable income. Within the framework of the theoretical model for closed economy, this leads to dependence of the elasticity of the market demand on the consumer structure. As a result, this relationship influences other market parameters.</p><p>In the second part of the present research the relationship between GDP per capita, income inequality, distance between exporter and importer and prices quoted by Apple, an American consumer electronics manufacturer, was estimated by utilizing the data sourced from the IMF, Euromonitor and official website of Apple. The obtained results indicate that the company charges the same prices to the majority of countries participating in the euro zone, but conduct price discrimination towards other countries. The analysis revealed negative link between prices of cell phones, tablets, laptops, personal computers and GDP per capita. These findings could be explained by the fact that consumers in richer countries have access to wider product variety, which limits the ability of producer in setting higher markups. Besides, there is a negative relationship between prices and inequality of income distribution in the country of destination. In other words, the manufacturer quotes higher prices for identical goods in countries with lower income inequality and larger middle class as it displays growing demand for Apple&rsquo;s products. The only product category whose prices are affected by the distance between producer and importing country turns out to be the personal computers iMac because their transporting is accompanied by more rigid conditions than other product groups do.</p>

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