Income Distribution, Price Elasticity, and the 'Robinson Effect'

Abstract

In The Economics of Imperfect Competition, Joan Robinson argued that an increase of the consumers' incomes should make demand less elastic - which, though reasonable about individual demand as an assumption on preferences, suggests a role for income distribution as far as market demand is concerned. We model increases in aggregate income as first-order stochastic dominance shifts of the income distribution, and use Esteban's (1986) income share elasticity to provide sufficient conditions on income distribution that support the 'Robinson effect' - i.e., such that a negative (positive) relationship between indivual income and price elasticity translates into a negative (positive) relationship between mean income and market demand elasticity. The paper also provides a framework to study the effects of distributive shocks on the price elasticity of market demand.